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Chapter 27, Part I. Let’s Meet with Dollar Index. Page 3

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Despite the fact that the US dollar index indeed highly correlated (moves in mirror direction – see chart #2) with the EUR/USD, it could be very useful for long-term analysis, especially fundamental one. The point is that index was initiated in 1973 when floating rates where adopted by the world’s financial community. Such long-term history is very useful in long-term fundamental analysis, especially if you’re focused on economic cycles. Also it could be used for search of inter-market divergences. But in general you’re right – this index is highly correlated with EUR, but not only with EUR:

    Source: Bloomberg, Intercontinental exchange (ICE)
    Pipruit: And what is inter-market divergence?

    Commander in Pips: Well, we will talk about it later in detail… Since EUR/USD has 94% correlation with USDX, we may search divergence EUR/USD with US DX. If, say, EUR/USD has shown new high, while US DX does not show new low (since the correlation is negative) – this could warn us about a possible reversal. In other words, we deal with this as with common divergence, but use a US DX chart instead of some indicator. That is a very common practice.

    Pipruit: Cool!
    Dollar Index Interpretation

    Commander in Pips: Here is the daily chart of US Dollar Index, the current quote is 75.972 points.

    Chart #1 | Daily USDX

    Since this is an Index, it quotes in points (as in the Lord of the Rings movies – beer comes in pints). That’s quite common for any index quoting. For example, S&P 500 index also comes in points. The major difference between indexes is in value of the point. While S&P point value is $250, USDX point value is $1000. It means that if USD index will change from 77.000 to, say 76.000 and you have 1 contract short position with it – your assets will increase by $1000.
    #1 Sive Morten, Dec 26, 2013
    Lasted edited by : Oct 8, 2016
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