The US dollar is the world’s most dominant reserve currency with two thirds of total allocated foreign exchange reserves of countries being held in US dollars.
With this in mind, it is prudent to always begin a market analysis with the US dollar Index given it has such a large impact on global markets.
There are many correlations at play with the US dollar and keeping this in mind will give you further confluence factors for your trade thesis. Tools such as OANDA’s Currensee Correlation can give you examples (I also use Tradingview’s correlation indicators to build on this further).
For example if I see a clear weakness in the USD, I will automatically look at pairs such as the EURUSD or XAUUSD (Gold) for bullish confluence factors given the inverse correlation.
There are two US dollar indexes I analyse – the DXY (Tradingview Symbol: DXY) & the FXCM Dollar Index (Tradingview Symbol: USDOLLAR). The differences between these two will be the weighting of the basket in each index.
EUR – 57.6%
JPY – 13.6%
GBP – 11.9%
CAD – 9.1%
SEK – 4.2%
CHF – 3.6%
FXCM Dollar Index
EUR – 25%
GBP – 25%
JPY – 25%
AUD – 25%
You can see from the weightings that one index is heavily weighted towards the EUR and this needs to be kept in mind when analysing the charts.
In addition to this, I also analyse the USDSGD chart to see the strength of the US dollar in the asian market to get a clearer idea of its impact to currencies such as the AUD.