“Foreign currency conversion can have a positive or negative effect on operating results. Now, the dollar index is very elevated and will ultimately serve as a headwind for overseas business of U.S. corporations,” Bevins says. Moreover, as Europe settled the Brexit issue in late 2020, it lifted the cloud of uncertainty hanging over the euro and British pound. It is likely that the currencies in the index will change again, as the index adapts to better represent those countries that the U.S. buys from and sells to most.

Why was the US Dollar Index created?

It was created shortly after the Bretton Woods Agreement collapsed, and its intention was to track the dollar’s performance compared to the currencies of the main US trading beaxy review partners. Since the 1980s, it has become tradable as a futures contract, and speculators have been using it as a way to speculate on the movement of the US Dollar against a basket of other major currencies. The U.S. Dollar Index – abbreviated USDX – is the value of the U.S. dollar measured against a group of six foreign currencies. Just as a stock index measures the value of a basket of securities, the U.S. Dollar Index expresses the value of the dollar in relation to a basket of currencies. Professional investors use futures and options contracts to invest in the Dollar index.

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The basket of currencies consists of the Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona. Options on the futures contracts began trading on September 3, 1986. Dollar Index futures and options on futures are available exclusively on the ICE electronic trading platform. ICE operates 13 regulated exchanges, including ICE futures and OTC exchanges in the US, Canada, Europe, and Singapore. It also is the parent company of the well-known New York Stock Exchange.

Latest On ICE U.S. Dollar Index

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To use an (over-simplified) analogy, the dollar is like the lifeblood of the world economy. When it flows freely (cheaper versus other currencies), the global economy tends to thrive. But when it slows down (becomes more expensive), the economy might struggle to keep up. Investors can also buy and sell options on ETFs that track the index, giving them a leveraged way to profit on price changes in the ETF. Dollar “pairs” at the same time, you would trade the index, which would rise and fall in line with the overall sentiment regarding the U.S.

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Dollar Index (USDX), which helps investors understand the relative strength of the dollar. This key index helps them see how the dollar’s value impacts consumer prices, demand for imports and exports, and the condition of the economy as a whole. Interest rate differentials play a leading role in the value of one currency versus another.

What Is the U.S. Dollar Index (USDX) and How to Trade It

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer’s credit rating, or creditworthiness, causes a bond’s price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made.

The short-term Fed Funds rate dropped to zero percent as the financial fallout from COVID-19 gripped markets, narrowing the rate difference between the dollar and the euro currency. As the yield benefits of the dollar declined, it sent the US currency lower. The index calculation is simply the weighted average of the U.S. dollar exchange rate against these currencies, normalized by an indexing factor (which is ~50.1435). The exponent figures following the currency pairs are the weightings (see above).