The Dollar Index Is Useless

I’ve never been a fan of the US dollar index. I consider it to be fundamentally flawed as a general indicator of US dollar strength.

Firstly, 57.6% of the index is weighted by EUR which means over half the index is about the Euro. All too often the USDX chart is simply an inverse EUR/USD chart.

And then there is the Swiss Franc. In recent times the Swissie has been THE safe haven currency of choice and 20% stronger against the dollar than about two years ago. But, CHF is now pegged to EUR at a minimum of 1.20. This peg has a direct influence on USD/CHF. Because of the peg, when EUR rises CHF automatically rises with it (EUR/USD and USD/CHF move in perfect inverse sync). So the 3.6% CHF weighting can be added to the 57.6% EUR weighting to make the EUR weighting 61.2%. Would you really consider that to be a fair representation for a dollar index?

The euro makes up such a huge portion of the U.S. Dollar Index, we might as well call this index the “Anti-Euro Index”. Because the USDX is so heavily influenced by the euro, people have looked for a more “balanced” dollar index…

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And then I find this really unbelievable. AUD, which is the 5th most traded currency in the world, is mysteriously not included in the index. But the Swedish Krona is! It’s a fact many forex traders are unaware of. You could even argue that gold, crude oil and maybe even copper be included in the basket too!

As a single trading instrument USDX is as good as any other. As a broader spectrum of dollar strength or weakness it fails miserably.



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