The Fundamentals of the USDX

Indices are concepts that anyone who has ever traded in the stock market is acquainted with. It is used to gauge the strength or weakness of a given set of securities. There are indices for the futures markets, and the U.S. Dollar is no exception either.

It is called the U.S Dollar Index or USDX for short, and it is something that forex traders who trade the greenback find very useful. It is made up of six forex currencies: the Euro (EUR), the Japanese Yen (JPY), the Canadian Dollar (CAD), the British Cable (GBP), the Swedish Kronas (SEK) and the Swiss Francs (CHF).

The performance of the currencies against the U.S. Dollar is used to measure the strength of the greenback, particularly in the forex. The measurement by which the Dollar gains strength or loses ground begins at the 100.000 level. If the Dollar falls to the 70.000 level it means it has lost 30% of its value. If the scale goes up to 130.000 then it has gained 30%.

The way in which numbers are attained is done through what forex analysts call the geometric weighted average. The currencies in the USDX are given "weights", and because the Euro is used by over a dozen countries, it has much greater weight, comprising almost 60% of the USDX.

Learning to read the USDX is important for a number of reasons. First is that all the major currencies are paired with the Dollar, and even if the currency you are holding is not, chances are it is either positively or negatively correlated to the Dollar. Even a currency like the Yuan, which is artificially pegged, is heavily influenced by the greenback.

Of course, it is important to keep in mind that the USDX, while a valuable tool, only shows you the movement in value of the Dollar against other forex currencies. To be able to judge what is causing the Dollar to behave in such a manner, it is important to keep a watch over the various reports that stream in constantly.

If you have traded before in the stock market, getting to know how the USDX works will not be a problem. If you are new to the forex, it will not be that hard either as most of the information about the USDX are now available in various sites all over the Internet.

However, all the information there are just tools. What is important is learning how to use them to help you make profits.