One of the more interesting and helpful tools we have as traders is to use the correlation of the dollar index ($DXY) with our US dollar currency pairs. However, since non USD currencies don’t have their own index, we’ll have to make one. Let’s dive in!
First of all, the dollar index is basically showing the strength or weakness of the US dollar vs. a basket of currencies. Kind of like the S&P 500 is used to measure the direction (strength or weakness) of the average stock, we can use the dollar index in the same way for US dollar currency pair trades. Currently, the dollar index is vs. the basket of: EUR, JPY, GBP, CAD, SEK, and the CHF. The weighting will vary slightly over time, but right now the EUR is approximately 57%, the Yen about 14%, and the Pound about 10%. Here is how it looks on a chart:
On this chart, I’ve marked in the high point on the dollar index going back to the beginning of the year, as well...
Last edited by a moderator: