If you’ve traded stocks, you’re familiar with all the indices available such as the Dow Jones Industrial Average (DJIA), NASDAQ Composite Index, Russell 2000, S&P 500, Wilshire 5000, and the Nimbus 2001. Oh wait, the last one is actually Harry Potter’s broomstick.
Well if U.S. stocks have an index, the U.S. dollar can’t be outdone. For currency traders like us, we have the U.S. Dollar Index (USDX).
The U.S. Dollar Index consists of a geometric weighted average of a basket of foreign currencies against the dollar.
Come again?! Okay before you fall asleep on us after that super geeky definition, let’s break it down.
It’s very similar to how the stock indices work in that it provides a general indication of the value of a basket of securities. Of course, the “securities” we’re talking about here are other major world currencies.
The U.S. Dollar Index consists of six foreign currencies. They are the:
- Euro (EUR)
- Yen (JPY
- Cable (GBP)
- Loonie (CAD)
- Kronas (SEK)
- Francs (CHF)
Here’s a trick question. If the index is made up of 6 currencies, how many countries are included?
If you answered “6”, you’re wrong. If you answered “17”, you’re a genius.
There are 17 countries total because there are 12 members of the European Union plus the other five (Japan, Great Britain, Canada, Sweden, and Switzerland).
It’s obvious that 17 countries make up a small portion of the world but many other currencies follow the U.S. Dollar index very closely. This makes the USDX a pretty good tool for measuring the U.S. dollar’s global strength.