Why US Dollar Index important for Forex?
What Is Dollar Index?
You must be aware the famous Nasdaq, Dow Jones and S&P 500. But have you heard about the US dollar index? As well as the aforementioned stock indices, it is used to measure the strength or weakness of the US dollar (USD) against a basket of main currencies.
Abbreviations for the US Dollar Index are DXY and USDX.
This index is very useful in the formation of the US dollar against the displacement of a number of actively traded currencies. Currency Basket involves EUR, JPY, GBP, CAD, AUD and CHF. It is strongly inclined to the euro, as this unit is 57.6% of the weight of the basket.
Why index is so heavily weighted to the Euro part?
Because, before the introduction of EUR, this index contained the French franc, the German mark, Italian lira and other European currencies. But when the euro has emerged as the single EU currency in 1999 year, it replaced all of the above national currencies.Professional traders use it in order to diversify the USD spot transactions. Also, the index is used to trade EURUSD due to the fact that the couple and DXY moving in opposite directions. When EURUSD rises, the USDX falls. And as the US dollar index is heavily tilted to the EUR, it may to some extent reflect the movement of the euro on the Forex Market.
EURUSD and DXY Index Propotionality:
If USDX chart reflects an upward trend, and the movement is on the verge of a breakthrough with a beautiful image of the head and shoulders pattern, then it means a possible business decline for the US dollar index and thus the weakening USD.So, the EURUSD chart gives a bullish outlook for the US dollar, while the USDX chart reflects a bearish outlook for USD. Both of these signals do not confirm each other. Thus, you should refrain from a short trade on the EURUSD.
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