What is the DXY Dollar Index?
DXY is a reference for many market watchers and commentators and quotes. So, what is DXY or the dollar index?
DXY is the geometric weighting index of some of the major US trading partners. If the DXY index is highly weighted for European and European countries that are not members of the European Common Market, then the portfolio is combined. The components of the DXY Index (weighted) are: Euro (57.6%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%) and Swedish Krona Swiss Franc (3.6%). Due to the composition of DXY, it is sometimes called the anti-Euro index.
DXY is a convenient index used as a simple method of reference to the strength of the US Dollar (USD). But its prevalence disguises the fact that it does not reflect the value of the dollar against a broad basket of currencies. DXY was created by JP Morgan in 1973, it was only updated once for the introduction of the Euro currency
DXY Weighting on the European currency, it reduces the proportion of the Canadian dollar to the US trade, which to a large extent On the important Asian and Pacific trading partners, including South Korea, Australia, Taiwan and China. Even a person interested in including the yuan, including the renminbi, is also difficult and questionable information value because China keeps its currency linked to the dollar-based range
A more accurate basket of currencies to track the relative value of the dollar would be The dollar against the United States' top trading partners. The top six US trading partners from high to low are: Canada, China, Mexico, Japan, Germany and the United Kingdom. It's hard to say why JPMorgan created this index, and how it went into such prominence. One of the strange things about this index is that you can not trade it. There is no market, you can go to buy DXY. The closest you can get is futures and options contracts traded on the Intercontinental Exchange (ICE).
If it is so inaccurate, then why is it so widely cited? While there are more accurate ways to standardize the dollar, absolute precision is not always an important indicator. Many traders and institutions may have their own index, they are used to track the dollar, but for comparison, there is a common index is very convenient. DXY is also highly correlated with the trade-weighted index for most of the time. The relative strength of the dollar moves represents a large monetary movement. As I wrote earlier, DXY's recent + 10% move represents more than $ 1 trillion in nominal wealth destruction. This magnitude of movement does not occur in a vacuum, and the relative weakness of DXY is reflected by the corresponding weaknesses in the trade-weighted index.
Although there are drawbacks, DXY does indeed serve as a reliable indicator of dollar strength and weakness and can be used as long as one remembers that the euro appears to be occasionally distorted when large currency moves