Why The DXY Is So Useful For Traders - TradingView Chart
The DXY is a very important and valuable barometer that we can't really trade without. Here is the DXY chart on the tradingview website: https://tradingview.com/symbols/INDEX-DXY/
We have also just added further great DXY resources, tips and advice on our website here: https://financialsource.co/why-the-dxy-is-so-useful-for-traders/
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We have a question from a new subscriber asking why we place so much focus on the Dollar in our trading, and more specifically why we always include the Dollar Index in majority of our analysis?
Thanks for the question. So, a couple of important points about the Dollar itself and then we can move on to the Dollar Index, either known as DXY or also USDX.
As currency traders, we always want to be keeping very close tabs on the major currencies around the world, but even more so on the US Dollar. If you take a look at recent trends in 2019, some statistics showed that 88% of all forex transactions included the US Dollar, that’s massive if you think about it.
Being the most traded also means it’s the most liquid, especially when we pair it against other major currencies like the EUR the GBP or the JPY as a few examples.
As the world reserve currency, it is accepted through the world for trade, and according to some sites like TheBalance.com almost 40% of the world’s debt is issued in Dollars, it’s also the currency that most commodities are priced in so big fluctuations in the Dollar’s value affects commodity prices, it’s seen as a safe haven due to it’s stable government and stable economy, and more than 61% of all foreign bank reserves are denominated in US Dollars.
So, to sum it up, it’s a very important one to keep on your radar, as any big fluctuations will affect most of the FX space and commodities as well.
Coming then to the DXY and why we use it, we find it’s a great and important tool to use as it serves as a great barometer to evaluate the relative strength of the Dollar versus it’s major peers.
One of the things that many has criticized of the index is the weighting, with the EUR accounting for 87.6% of the weighting that means the moves in the EUR often dictate how the DXY to a large degree will react, so being EUR heavy does mean it’s not as accurate as something like a trade weighted Dollar Index.
And while that is a fair complaint, we still find that it’s a valuable and useful tool to use to analyse the overall strength of the Dollar against it’s major peers.
A useful example to use the DXY is to know whether overall moves you see in the currency space is Dollar driven or not, so for example if we see a lot of DXY upside and EURUSD downside, but the other major currency pairs are fairly stable or contained, it points to a broader EUR move and not a Dollar move driving the pair, which is helpful.
Vice versa, if you suddenly see the AUDUSD moving lower or higher very fast and it is not driven by risk flows but you see all the other majors reacting the same way, then it shows to a broader dollar move as opposed to a AUD move, and can help you to establish whether the move is enough to liquidate your trade or whether you can fade the move.
So, hope that helps, any other questions don’t hesitate to let us know.
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