The DXY: measuring dollar strength

The DXY measures the US dollar against a basket of currencies. It is one of the most useful charts
to keep open alongside whatever pair you trade.

1. What is in it

Six currencies, very unevenly weighted:

• EUR — about 57.6%
• JPY — about 13.6%
• GBP — about 11.9%
• CAD — about 9.1%
• SEK — about 4.2%
• CHF — about 3.6%

The important part is the first line: the euro is nearly 58%. In practice the DXY
is largely an inverted EUR/USD.

2. What follows from that

• The DXY does not reflect dollar strength against Asian currencies other than the
  yen, or against emerging markets.
• It contains no renminbi, despite China being a leading US trading partner — because the basket has
  stood unchanged since 1973, adjusted once when the euro was created.
• A rise in the DXY can simply be a fall in the euro, rather than
  broad dollar strength.

3. How to use it well

Confirming a signal

You see a buy signal on EUR/USD. Open the DXY: if the index is breaking above resistance, your
signal is running against the main flow. That does not make it wrong, but it calls for a more careful
size.

Telling cause from effect

GBP/USD is falling. The question: is sterling weak or the
dollar strong? If the DXY is rising and EUR/USD is falling correspondingly, it is a dollar story. If
the DXY is flat and only GBP/USD is falling, the problem is sterling — and you should look for UK
news.

Avoiding duplicated risk

If you are short EUR/USD, short GBP/USD and short
AUD/USD, the DXY shows plainly that you hold one long
dollar position at triple size.

4. What drives the DXY

• Fed rate expectations — the dominant factor.
• Global risk-off — the dollar is a
  haven, so a crisis usually lifts the DXY.
• The growth gap between the US and Europe.

5. The link to gold

Gold is priced in dollars, so the DXY and gold usually move opposite. But the relationship is
not absolute: in a severe crisis both rise, because both are havens. Use it as a
reference, not a rule.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.