Saturday, January 26, 2013

US Dollar Index: Important for Currency Traders

Traders are much familiar with Indexes. To name some very familiar indexes we may list DOW JONES [DJIA] (US), NASDAQ (US), NIFTY (INDIA), BSE SENSEX (INDIA), FTSE (UK), SHANGHAI COMPOSITE (CHINA).

Index or Indices represent the weighted average value of the top listed securities and stocks in an exchange. These top listed stocks are kind of a basket of stocks whose collective movements are represented in a broader way through the Indices. More or less the direction of all the stocks will be reflected in the movement of the index whether up or down.  Each stock will have its own weight in the average according to its market capitalisation.

In the same manner the US Dollar has its Index known as the USD Index [USDX]. US Dollar is a very important currency at a global level and therefore an index to represent US Dollar against other currencies of the world an index was needed. So it was created in 1973.

The U.S. Dollar Index consists of a basket of six foreign currencies. They are the:
  • Euro (EUR)
  • Yen (JPY)
  • Pound (GBP)
  • Canadian dollar (CAD)
  • Krona (SEK)
  • Franc (CHF) 
Euro is used in 16 European countries who belong to the European Union. Therefore these six currencies in total represent 21 countries.

The movement of US Dollar Index will show the current scenario in relation to the demand and supply of US Dollars at global level. Though these 6 currencies are the main currencies but US Dollar Index is tracked by many other major currencies of the world. Therefore from a trading point of view in the currencies market the reading of USDX can play a very important role in decision making to gauge the strength of the US Dollar vis-à-vis other currencies.

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