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If you are relatively new to the financial world, you might have heard a little more experienced people talking about “DXY” or “Dixie“.
DXY is the ticker used on the Bloomberg terminal to represent the Dollar index (USDX).
Dollar index is a currency index just like we have other more familiar stock indices like NASDAQ, S&P500, DJIA (Dow Jones Industrial Average).
The Dollar index, DXY (or USDX) is made up of 6 currencies:
- Euro (57.6%)
- Japanese Yen (13.6%)
- British Pound (11.9%)
- Canadian Dollar (9.1%)
- Swedish Krona (4.2%)
- Swiss Franc (3.6%)
These percentages are determined based on Geometric weighted averages based on the size of the economies of these countries.
As the Euro is acceptable by 19 countries in Europe, it has the biggest combined economy and therefore the highest percentage in the Dollar Index.
Similar to other indices in their sector, Dollar Index can be used to measure the US dollar’s global strength against this basket of global currencies.
Can the Dollar Index or DXY be traded like other currencies?
Yes. The Dollar index can be traded just like the other currencies on an exchange.
In fact, technically the “U.S. Dollar Index”, “Dollar Index” & “USDX” are a trademark of ICE Futures US Inc. (Intercontinental Exchange Group).
The dollar index can be traded as spot – USDX.
It can also be traded as a futures contract as – DX.
A more popular symbol or ticker used by Bloomberg Terminal – DXY.
Another fun fact, the NYSE (New York Stock Exchange) is owned by Intercontinental Exchange Group as well.
Why should I care about the Dollar Index or DXY?
Even if you are not a currency trader but rather an investor or speculator in the stock market, you should still keep a close eye on the DXY.
DXY can be used like a leading sentiment and economic indicator and can provide great insights about how the S&P might behave in the near future.
It has found to be inversely correlated to the stock market and other Stock & Equity indices.
Which means when the DXY goes down, we can expect a bull run in the stock market and vice versa.
When the DXY shows a lot of strength and starts to climb, its seen as a sign by speculators for an upcoming weakness in the stocks & equities.
How can I use the Dollar Index or DXY for Investment and Trading decisions?
Lets say we notice the DXY losing strength and dropping on the chart; it doesn’t necessarily mean that Dollar is going weak against other currencies. It is usually seen as a Risk-On by speculators and traders in the stock market. People selling off their dollars into more risky assets like stocks.
Whenever interest rates are going lower, simply putting your money in the bank to earn savings interest is not lucrative. The cost of capital is low due to lower interest rates.
That’s the time people try to speculate in the financial markets and we see a boom in the stock market.
So, Low interest rate + DXY going down = Stock Market Up potential.
Similarly when the Dollar Index starts to rise, combined with high interest rates. It doesn’t necessarily mean that the Dollar is strengthening against other currencies. It could also mean that the cost of capital is high and people see (cash) Dollar as much more valuable. Under such conditions, a rising dollar can serve as a leading indicator for a sell-off in the risky assets (stocks).
Again, High interest rate + DXY going up = Stock Market Down potential