Reading the US Dollar Index
Like any currency pair, the US Dollar Index (USDX) has its chart. How is the US Dollar Index Calculated? This is strictly for the grown and geeky. Here is the formula for calculating USDX: USDX = 50.14348112 × EUR/USD^(-0.576) × USD/JPY^(0.136) × GBP/USD^(-0.119) × USD/CAD^(0.091) × USD/SEK^(0.042) × USD/CHF^(0.036).
Use the USDX for Forex Trading
In the wide world of forex, the USDX can be used as an indicator of the U.S. dollar’s strength. Because the USDX is comprised of more than 50% of the eurozone, EUR/USD is quite inversely related. Check it: USDX Daily Chart. Next, take a look at a chart of EUR/USD.
EUR/USD Daily Chart It’s like a mirror image! If one goes up, the other most likely goes down. Will you look at that? It seems like the trend lines almost inversely match up perfectly. This could be a big help to those big on trading EUR/USD. Some of our forex trading friends in the forums monitor the USDX as an indicator for EUR/USD. Hang out with them to learn more about using this index. If the USDX makes significant movements, you can almost surely expect currency traders to react to the movement accordingly. Both the USDX and forex traders react to each other. Breakouts in spot USD pairs will almost certainly move the USDX in a similar breakout fashion. To sum it all up, forex traders use the USDX as a key indicator for the direction of the USD. Here are two little tips you should never forget: If USD is the base currency (USD/XXX), then the USDX and the currency pair should move in the same direction. If USD is the quote currency (XXX/USD), then the USDX and the currency pair should move in opposite directions.