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The Dollar Index at Its Highest Level Since 2002

By:
Carolane De Palmas
Published: Aug 23, 2022, 07:06 UTC

The U.S Dollar Index (USDX) has been on a consistent trend upwards this past few months.

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Once again it has hit an almost new high of 2022 at 108.85 (at the time of writing), which is just shy of the 109.14 recorded on July 14th. The last time we saw numbers like these was back nearly 20 years ago in December 2002, when the dollar was performing extremely strongly relative to most other currencies, and was just shy of 119 at its peak.

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Daily chart of the Dollar Index (September 2022) – Source: ActivTrader platform

So what’s the driving force behind the increase in value this year? Will it go higher? Let’s take a look at some of the background and stats for the USDX.

What Is The Dollar Index?

The USDX was originally introduced in 1973 by the U.S Federal Reserve, during that time it included the German mark, Dutch glider, French franc, Italian lira, Belgian franc, Swiss franc, Japanese yen, Canadian dollar, British pound, and the Swedish krona, until it was adjusted for the first and only time in 1999 when the Euro came into use and replaced some of the previous currencies.

The collection of currencies that remain in the index is generally thought of as a representation of the most significant U.S trading partners, and the underlying point of the index itself is to measure the value of the U.S dollar against those currencies.

The USDX has had since its inception, as it does now, a base of 100, and throughout its history has experienced many highs and lows depending on a variety of factors. If the index value goes above 100, then that is suggestive of an appreciation of the USD relative to the other six currencies. If the index is losing strength against the other currencies then it will be below 100. In 1984, the USDX hit a record high of almost 165. Conversely, 2007 saw the index drop to a low of nearly 70 at the beginning of the financial crisis.

It can be affected by a myriad of factors, mostly macroeconomic in nature; inflation, deflation, interest rates, economic growth or lack thereof, supply and demand, and major world events, among others. Any factor that would influence each individual currency in the index and/or the USD can affect the overall USDX.

It’s also really important for traders to take some notice of the weightings given to the currencies within the index, as price movements on one currency, like the Swiss Franc, for example, will have far less significance than if the same movements were to occur with the Euro. They’re not close to being on equal footing within the index, so the impacts would be different.

The weighting given for each currency is as follows:

  • Euro (57.6%)
  • Japanese yen (13.6%)
  • British pound (11.9%)
  • Canadian dollar (9.1%)
  • Swedish krona (4.2%)
  • Swiss Franc (3.6%)

Why Has the Dollar Index Recently Reached New Highs?

Slowly over the last few months, amid numerous rate hikes by the Federal Reserve, the US dollar has been rising. Policymakers have cautioned that the country’s difficulties with soaring inflation will continue to be met with aggressive tightening of monetary policy over the coming months, regardless of a short recession as a likely side effect.

Mildly positive economic data in recent weeks has given many experts reason to question whether the Fed can start to reduce the rate of hikes at the coming meeting, with Reuters reporting recently that a poll of economists indicated that a move of 50 basis points was now slightly more feasible than the previously expected 75 basis points move for the Fed’s next meeting in September.

Fed Chair Jerome Powell, who will be present at the Jackson Hole symposium this year on August 25th-27th, will be updating the market on his views of the ongoing situation with the economy and the Fed’s role in stabilizing inflation. The economic event, located in Jackson Hole, Wyoming, United States, is closely followed by traders, as statements from prominent central bankers, leading financial players, ministers and academics can be impactful on stocks and currency prices.

In addition to conditions in the U.S, the euro has hit fresh lows this month after Russia declared that there would be a three-day closure of the Nord Stream 1 pipeline at the end of August, which is the main supply of gas to the Eurozone. This puts further pressure on the already strained situation, with energy prices in the region skyrocketing and inflation continuing to soar.

How to Take Advantage of the Dollar Index

There are a number of ways to trade the USDX by using derivative products for example, such as contracts for difference, spread bets, or futures, and it’s also available as part of some ETFs and mutual funds.

Using CFD with regulated brokers like ActivTrades allows the trader to utilize margin trading to take advantage of price movements heading upwards (long positions), as well as price movements heading downwards (short positions).

Some traders use the index as a means to hedge against any downside risk with the USD, or to speculate on the dollar’s movement against the other major currencies as well. When the outlook is unclear regarding the movements of the U.S. dollar, the USDX can generally provide a clearer picture.

However you choose to invest, and the financial products you prefer to use, it’s important to follow your overall trading strategy with strict money management rules, and only invest money you’re prepared to lose.

About the Author

Carolane graduated with a Masters in Corporate Finance & Financial Markets and got the AMF Certification (Financial Markets Regulator in France). Afterward, she became an independent trader, investing mostly in European and American stocks/indices.

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