The U.S. Dollar Index Chart: What It Means For Forex trading
The U. S. Dollar Index is an index for currency traders, and it consists of a geometric weighted average of a basket of foreign currencies against the United States Dollar. The U.S. Dollar Index, the same as stock indexes, gives a general indication of the value of a basket of securities. In this instance, the basket holds securities that contain other leading world currencies.
The U.S. Dollar Index has a basket that consists of six foreign currencies. These are the Euro, the Yen, the Cable, the Loonie, the Kronas, and the Francs. The index is comprised of six currencies, however it includes seventeen countries. The reason being there are twelve members of the European Union, in addition Japan, Great Britain, Canada, Sweden, and Switzerland. These seventeen countries may just be a small percentage of the countries on the planet, but there are lots of other currencies which follow the U.S. Dollar Index closely. The index is a great tool for measuring the global strength of the United states Dollar.
The components of the U. S. Dollar Index have a geometric weighted average. This is to factor in the fact that not every country is the same size, so each country is given a suitable weight when the U.S. Dollar Index is calculated. Euros account for a large portion of the U.S. Dollar Index, more than 50 %. The other five countries in the basket make up a combined total of forty three percent of the basket, with euros consisting of the other fifty seven percent.
The Federal Reserve makes use of another kind of dollar index, and this is called the trade-weighted U.S. Dollar Index. This index was developed by the Feds to more accurately reflect the value of the dollar against foreign currencies based on the competitiveness of U.S. goods compared to other countries. The biggest difference between these two indexes is the basket of currencies that are used as well as the relative weights of the currencies. The weights are based on annual trade data, and this is why it's known as the trade weighted U.S. Dollar Index.
No matter which U.S. Dollar Index you are looking at, these indexes assist Forex traders know the value of the United states Dollar, and the global strength also. Forex traders use these indexes to assist them figure out the value of a currency in comparison to the U.S. Dollar. There are 2 U.S. Dollar Indexes, and the second one is called trade weighted U.S. Dollar Index. This index is based more on actual trade data, but countries are given weights in this index also.
Article Source: FxTradingStock.com
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Date: Sun, 27 Mar 2011
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