History of the Dollar Index

One of the reasons the US dollar has been able to become the most common currency in the world for transactions is the Bretton Woods agreement (concluded in 1944, though the text mentions 1973, which is when the gold standard was fully abandoned; I will translate as written: 1973). In this agreement, the US government and 100 countries of the world agreed that the value of the US dollar would remain fixed and this currency could be used for their transactions. In that year, the US Central Bank (the Federal Reserve) guaranteed that the price of one ounce of gold would be equivalent to 35 US dollars.

It wasn't long before all countries realized that this pricing was higher than the real value of the dollar, and one by one they withdrew from this agreement. Currently, the price of each gold ounce GOLD fluctuates between $4300 and $4000 US dollars, which is a very large difference compared to the dollar value mentioned in the agreement. However, this same agreement led to the formation of a concept called the US Dollar Index. Since the US has been one of the world's strongest economies (about 35% of the world's economy) and has multiple economic partners, this index shows investors the general condition of the global economy (the US economy compared to its major trading partners).

Application of the US Dollar Index

All over the world, the US currency is named as one of the safest investments. This means that whenever the market fluctuates, a large amount of capital flows from various markets into the US dollar. For example, when the housing market is shaky globally and investors are unsure about its future, they withdraw their capital from the housing sector and instead save dollars in their bank accounts. This increased demand for buying dollars causes its value to increase compared to other world currencies, and the dollar index will rise.

This capital flow is not limited to the housing sector, and almost all markets, if they face a crisis or instability, investors will quickly move towards the dollar. For example, capital in global stock markets, cryptocurrency markets, gold, forex, etc., are fluid capitals that, in case of problems, will quickly be converted into US dollars.

Importance of USDX

As you noticed, the dollar index tells us at a glance how the situation of various markets is! If the US dollar index is increasing, this means that risk is rising in other markets, and an investor should hold back a bit before entering any market. Conversely, if the USDX is decreasing, this means that the dollar is being converted into various assets in other markets, and there is a possibility of a price jump in these markets. Therefore, investors use this very important signal to make a final decision about entering the market and never invest against the capital flow. To read more about the US Dollar Index and understand its importance, read this article.

Trading USDX or using it?

Traders in various markets use this index to conduct their trades securely. However, there is another mode of trading, which is trading on the USDX itself. Since there is no physical commodity in this index, trading it must be done using futures contracts in the futures market. Some forex brokers offer this asset for trading. For example, the Alpari broker offers this index to its clients, which is explained in more detail on the Iran-Broker website.

Displaying the Dollar Index on TradingView

One of the most powerful websites available for completing information and performing technical (and even fundamental) analyses is the TradingView website, which is always open in front of traders! This website is one of the most comprehensive investment market websites and provides you with unique tools and indicators. By opening a free account, a trader can analyze the desired chart, draw support and resistance lines, and draw various indicators on the candlestick chart. The positive point of this website is that the history of all your analyses is saved, and there is no need to analyze again.

USDX Chart

The US Dollar Index has a long history and has gone through many ups and downs. For example, in 2008, when the global and particularly US economic recession affected markets, many investors lost large parts of their capital. Whenever global economic problems occur, all currencies lose their value, but shortly after, the US currency strengthens! Since the US is a pioneer in economy and industry worldwide, the whole world looks to the US to hopefully provide a way out of the global recession. For this reason, the US currency, or the dollar, quickly strengthens against all world currencies, and then, with the resolution of the problem, the currency balance will return to its normal state. For example, you can check the chart of the dollar index changes during the Corona pandemic to see these changes with your own eyes.

Displaying the US Dollar Index in MetaTrader

One of the most common trading platforms worldwide is the MetaTrader trading platform, with its fourth version, MetaTrader 4, being the most popular globally. MetaQuotes introduced this platform in 2003, and then released its newer version in 2008. Since most global traders use this platform for analysis or executing their trades, it is better to know how to display the dollar index in MetaTrader. However, before that, it is better to know that USDX might not be available in your MetaTrader, as only a few reputable global brokers have included this index in their MetaTrader lists.

If the version you are using supports the dollar index, you can easily add the USDX chart to MetaTrader from the View menu, observe its trend changes in different timeframes, analyze it, and even trade on it.

What is the difference between USDX and DXY?

In practice, there is no difference between USDX and DXY, and both refer to the same US Dollar Index, which is referred to as USDX on some websites and DXY on others. It is interesting to know that this index is influenced by US microeconomic elements and reacts strongly to them. For example, an increase or decrease in inflation in the US (or other countries whose currencies are in the basket) can cause significant changes in this index.

It is worth mentioning that the highest value of the US Dollar Index was recorded in February 1985, with a value of 164.27. This means that in that year, the US economy was at its strongest point relative to its trading partners. Conversely, on March 16, 2008, the US Dollar Index fell to 70.698, recording its lowest level since 1973.

The DXY index is one of the most important market indices in directing price trends, such that whenever this index has an upward trend, consequently, other countries' currencies weaken against the dollar, and raw materials take a downward trend globally. And whenever this index has a downward trend, consequently, other countries' currencies become stronger against the dollar, and raw materials become more expensive globally. The highest number the index has ever tested was in February 1985, when the index value was 164.72, and the lowest number the index has ever tested was in March 2008, when the index value was 70.96.

Points to note about the Dollar Index

1. The most significant impact on dollar index changes occurs with the decisions of the US Federal Reserve and the European Central Bank.

2. Other countries' currencies have a severe dependence on this index.

3. The global price of raw materials (oil, gold, and other materials) depends on the movement trend of this index, such that whenever the dollar index increases, raw materials become cheaper, and whenever the dollar index weakens, raw materials become more expensive globally.

4. The dollar index and the price of Bitcoin move in opposite directions.