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Trading The Dollar Index

The US dollar index (DXY) is an important analytical tool for traders in just about any market. The dollar index is a futures contract, which requires a futures trading account which could also be used to trade futures contracts such as corn, oil, gold, and precious metals. However, rather than trading the dollar index, most retail traders use it as way to analyze the relative strength or weakness of the US Dollar in general.

The Index compares the dollar against a basket of other world currencies. This basket represents most of the largest free floating, major currencies in the world on a weighted average basis. The currencies included are the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Each of these currencies are given a weight within the index with the largest weight given to the euro.

The euro is typically half the total weight included in the average the chart for the DXY and will often look like an inverse chart of the USD/EUR currency pair. However, because the USDX includes six different currencies it is a better measure of USD strength than any single currency pair, including EUR/USD.

The dollar index was established in 1973 with a starting value of 100. That means that if DXY is measuring less than 100, the USD has lost relative value compared to what it was worth in 1973. If it is above 100 then the USD is stronger than it was in 1973. Currently the index is hovering around 74, which means that it is 26% weaker than its starting value. The dollar has not always been weaker than it was in 1973, DXY showed a 20% improvement in value in the USD in 2001 and 2002.

The index is particularly useful for traders in the bond, currency and gold markets. Global crises often increase demand for the USD as investors seek a shelter from uncertainty, and historically that means a move into the most liquid of global bond markets; the dollar-denominated US Treasury market. This will drive the value of the USD up and often bond yields will drop. The index is an inter-market tool that can be used for evaluating capital flows and finding new trading opportunities.

Charts for the dollar index are available each day in TheLFB Global Video Charting reviews. Traders who are interested in trading the index have a few options. First, open a futures account to trade the index directly via the New York Board of Trade. Secondly, traders can use ETFs that track the dollar index itself, however, access is available only for 8 hours of US trade, rather than being available for all of the 24-hour dollar index day.

PowerShares offers two ETF alternatives for trading the index. The first is UUP which invests in long futures contracts on the DXY, which means it will move the same direction as the dollar index. The second is UDN which invests in short futures contracts on the DXY, which means that it will rise in value when the dollar index weakens. If a trader is bullish on the dollar they could buy UUP, and if bearish on the dollar they could buy UDN.

The third, and most popular option for many, is to open a forex trading account to trade OTC spot forex, which offer 24-hour access to global currency movement, and can be used to track and replicate dollar index moves by trading the major currency pairs. Margin is available in general at a rate of 50:1, and access on an intra-day basis is unlimited. Traders can open and close positions with impunity, and are then able to access pre-market and after-market momentum of regional cash trade, without being swept along on low liquidity moves.

TheLFB Training Academy offers introductory courses for those interested in further detail of trading currencies, as a hedge against portfolio moves, or just as diversification into the new generation of globally traded markets.