United States Dollar Index (USDX)

United States Dollar Index USDX Currency Basket Forex Trading U.S. Dollar Global Currencies Financial Indexes
An index that compares variances in the U.S. dollar's value on a scale of 100 with a basket of currencies that include the euro, the yen, the British pound sterling, the Canadian dollar, the Swedish krona, and the Swiss franc.
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Definition

The United States Dollar Index (USDX) is a measure of the value of the U.S. dollar relative to a basket of six foreign currencies. Specifically, the index is a weighted geometric mean of the dollar’s value compared to:

  • The Euro (EUR)
  • The Japanese Yen (JPY)
  • The British Pound Sterling (GBP)
  • The Canadian Dollar (CAD)
  • The Swedish Krona (SEK)
  • The Swiss Franc (CHF)

The index was created in 1973 with a base value of 100, and its movements are intended to reflect changes in the dollar’s strength compared to these other major currencies.

Examples

  1. USDX Value Increase: If the USDX rises from 100 to 110, this indicates that the U.S. dollar has strengthened by 10% against the basket of currencies.
  2. USDX Value Decrease: If the USDX drops from 100 to 90, this decrease shows a 10% weakening of the U.S. dollar against the referenced currencies.
  3. Historical Movement: During periods of global financial stability, the USDX often strengthens, reflecting higher confidence in the U.S. economy compared to the economies of the listed currencies.

Frequently Asked Questions

Q: How is the USDX calculated? A: The USDX is calculated using the weighted geometric mean of the value of the dollar relative to the six currencies. The weights are determined based on the significance of the trading partners of the U.S. as they were in 1973.

Q: Why does the Euro have the largest weight in the USDX? A: The Euro, when added to the index (replacing several European currencies), gained a significant weight because Europe is a major trading partner to the U.S. As such, fluctuations in the Euro have a substantial impact on the USDX.

Q: How frequently is the USDX updated? A: The USDX is updated in real-time throughout the day during forex trading hours to reflect ongoing currency market fluctuations.

Q: Can the USDX be traded? A: Yes, traders can trade futures contracts and options on the USDX via various financial exchanges.

Q: How does a strong USDX affect the U.S. economy? A: A strong USDX generally means more expensive exports, potentially reducing exports’ demand. However, it also indicates cheaper imports, potentially benefiting consumers and businesses importing goods.

  • Forex Trading: The act of trading currencies in the foreign exchange market.
  • Currency Basket: A group of selected currencies used to value another currency.
  • Geometric Mean: A mean that indicates the central tendency or typical value of a set of numbers by using the product of their values.

Online References

Suggested Books for Further Studies

  • “Currency Trading For Dummies” by Brian Dolan and Kathleen Brooks
  • “Day Trading and Swing Trading the Currency Market” by Kathy Lien
  • “The Little Book of Currency Trading” by Kathy Lien

Fundamentals of United States Dollar Index (USDX): Forex Trading Basics Quiz

### What does the USDX measure? - [x] The value of the U.S. dollar compared to a basket of foreign currencies. - [ ] The amount of U.S. dollars in global circulation. - [ ] The total reserves of gold in the U.S. Federal Reserve. - [ ] The debt-to-GDP ratio of the United States. > **Explanation:** The USDX measures the value of the U.S. dollar relative to a basket of six foreign currencies. ### What is the base value of the USDX? - [ ] 50 - [ ] 75 - [x] 100 - [ ] 150 > **Explanation:** The base value of the USDX was established at 100 in 1973. ### Which currency has the largest weighting in the USDX? - [x] Euro (EUR) - [ ] Japanese Yen (JPY) - [ ] British Pound Sterling (GBP) - [ ] Canadian Dollar (CAD) > **Explanation:** The Euro has the largest weighting in the USDX due to the significant trade relationships between the U.S. and European Union. ### What happens if the USDX rises from 100 to 110? - [x] The U.S. dollar has strengthened by 10%. - [ ] The U.S. dollar has weakened by 10%. - [ ] The value of the U.S. dollar remains unchanged. - [ ] The U.S. economy has grown by 10%. > **Explanation:** A rise in the USDX from 100 to 110 indicates that the U.S. dollar has strengthened by 10% relative to the basket of foreign currencies. ### How often is the USDX updated? - [ ] Monthly - [ ] Weekly - [x] In real-time during forex trading hours - [ ] Annually > **Explanation:** The USDX is updated in real-time throughout forex trading hours to reflect ongoing currency movements. ### Can traders speculate on the value of the USDX? - [x] Yes, via futures contracts and options. - [ ] No, it is only a reference measure. - [ ] Only through forex spot markets. - [ ] Only through government auctions. > **Explanation:** Traders can speculate on the value of the USDX through futures contracts and options on various financial exchanges. ### Which of the following is NOT part of the USDX currency basket? - [ ] Canadian Dollar (CAD) - [ ] Swedish Krona (SEK) - [ ] Japanese Yen (JPY) - [x] Chinese Yuan (CNY) > **Explanation:** The Chinese Yuan (CNY) is not part of the USDX currency basket. ### How does a strong USDX impact U.S. exports? - [x] Makes them more expensive for foreign buyers. - [ ] Decreases their price. - [ ] Has no impact. - [ ] Makes them cheaper for foreign buyers. > **Explanation:** A strong USDX means U.S. goods are more expensive in foreign markets, potentially decreasing demand for U.S. exports. ### Why is the Euro significant in the USDX? - [ ] It was the first currency to be traded with the U.S. dollar. - [x] Europe is a major trading partner of the U.S. - [ ] It has the same value as the U.S. dollar. - [ ] The Eurozone has the world’s largest economy. > **Explanation:** The Euro is significant in the USDX because Europe, specifically the Eurozone, is one of the major trading partners of the U.S. ### Where can one find historical data on the USDX? - [ ] Local newspaper archives - [ ] City libraries - [x] Financial market websites like ICE and Investopedia - [ ] Trade expos > **Explanation:** Historical data on the USDX can be found on financial market websites and platforms such as ICE and Investopedia.

Thank you for exploring the essentials of the United States Dollar Index (USDX). Continue enhancing your knowledge with our resources and tackle the quizzes for better understanding!

Wednesday, August 7, 2024
United States Government Securities
United Parcel Service (UPS)

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