
The U.S. Dollar Index (USDX) is a
geometrically-averaged calculation of six currencies weighted against the
U.S.dollar. The U.S. Dollar Index was created by the U.S. Federal Reserve in
1973.
In 1944, just before the ending of
World War II, the economies of the developed world made an agreement, called
the Bretton Woods agreement, which ensured that their currencies had a fixed
exchange rate against each other.
When this agreement was scrapped and
all currencies were allowed to float freely, the US Federal Reserve established
the US Dollar Index in order to provide an external trade weighted average that
measured the greenback against what were regarded as the most important global
currencies. These included, at the time, the German Mark, the French franc, the
Italian lira, the Dutch guilder and the Belgian franc. Those currencies have
now all been incorporated into the Euro, which accounts for the relatively very
high weighting of that currency in the index.
And therein lies the problem. For
starters, the value of the Euro against the greenback is such that it accounts
for 57% of the value of the index. But the ECB, the body that makes the
decisions that decide on the strength of the single currency, has its own
agenda. So do the Japanese, the next largest force in the index. Very often
these are opposing each other, cancelling each other out.
All of this makes the value of the US
dollar index, for traders, far less than it might appear to be on the surface.
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