What You Need to Know: The Dollar Index

The USDX was established in 1973 with a starting value of 100. That means that if the USDX is less than 100, the dollar is worth less than it was in 1973. Conversely, if the index is higher than 100, the greenback is stronger than it was back then.

Currently the USDX is hovering around 82, which means that it is 18% weaker than its starting value. It's important to remember that the dollar has not always been weaker than it was in 1973: The USDX was 20% stronger in 2001 and 2002.

The USDX is particularly useful for traders in the bond, currency and gold markets. For example, a strong dollar is usually correlated with falling gold prices, which means that gold traders are very interested in a breakout on the USDX even though they may not be trading the dollar directly.

Similarly, global financial crises often increase demand for the dollar as investors seek a shelter from uncertainty. This will drive the value of the dollar up, and often bond yields will drop at the same time. These are just two examples of how the USDX is one more intermarket tool you can use for evaluating capital flows and finding new trading opportunities.

Charts for the USDX are available on the pairs analysis pages in the forex section of the LFB/Learning Markets page.

If you are interested in trading the USDX you have two attractive alternatives. First, you can open a futures account. There are futures and options on futures available on the USDX that trade at the New York Board of Trade.

Second, you can invest in exchange-traded funds that track the USDX. PowerShares offers two such ETFs. The first is the PowerShares DB US Dollar Index Bullish(UUP), which invests in long futures contracts on the USDX. That means it will move in the same direction as the dollar index. The second is PowerShares DB US Dollar Index Bearish(UDN), which invests in short futures contracts on the USDX. This ETF will rise in value when the dollar index weakens.

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