What do you mean by dollar index?
As you all know dollar index is actually US Dollar index(USDX).It is the value of US dollar comparing with the values of other prominent world currencies .The other currencies are the Euro, the British pound, the Japanese yen, the Swedish krona, and the Canadian dollar.These currencies were chosen when the index was formed back March 1973, soon after the pulling down of the Bretton Woods system.In 1999, the euro replaced a suite of European currencies including the Deutsche mark, French franc, Italian lira and more.
If the dollar index goes up it means the US Dollar is picking up and vice versa.
Dollar Index Weightage
Euro has more weightage with 57.6% as it is the official currencyof 19 out of the 27 member state of European Union.other currency weightages are
- Yen (JPY) ) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF), 3.6% weight
You can view the live dollar index https://in.tradingview.com/ideas/dxy/
Investors and analysts track the U.S. Dollar Index as a useful and immediate indicator of the dollar’s strength relative to other currencies..A trader can develop a big picture sense of the flow of dollars and form an insight on how best to select profitable trading positions by watching the patterns on the chart mentioned above, listening to the major fundamental factors that affect supply and demand.
In addition to the U.S. dollar, many countries’ central banks tend to hold the index’s constituent currencies as part of their international reserves. While the U.S. dollar serves as the currency of choice for most, the euro and yen serve as backup currencies for many. A risk of holding non-U.S. dollar currencies is that any gain or decline in the dollar’s relative value could mean a weakening or a strengthening of those currencies.
How to trade in the U.S. Dollar Index
You can trade the US Dollar Index just like an equity index. Rather than trading several US Dollar pairs(dollar paired with one other currency like the U.S. dollar traded against the Indian rupee.)You can trade one index that should rise and fall in line with the overall USD market sentiment.If the USDX rises, then the US dollar has gained in strength versus the other currencies
Investors can also trade USDX futures through ICE platform(Intercontinental Exchange). Futures allow traders to hedge their accounts against currency risk and fluctuation in the U.S. Dollar. USDX futures can be traded for 21 hours a day through ICE.The Intercontinental Exchange helps individuals to buy and sell the US dollar index futures contract, among other commodities. We can trade the index via a futures broker through their trading platform.