Trading the US dollar: latest moves and forecasts for Q3 2019
As is the case with stocks and equities, the U.S dollar’s overall performance is tracked by the USDX or DXY index. The DXY basket of currencies comprises 6 foreign currencies spanning 24 countries since the EUR – which enjoys the largest weight in the index – is the currency of 19 EU member states.
The DXY index consists of:
- EUR (57% weight)
- JPY (13% weight)
- GBP (11% weight)
- CAD (9% weight)
- SEK (4% weight)
- CHF (3% weight)
When the value of the dollar increases against the above currencies, the DXY index goes up. On the other hand, when the euro to dollar or the pound to dollar rates rise, the DXY goes up since it means the dollar has depreciated against the other major currencies.
If you are trading the EUR/USD pair, you should note that the index provides an accurate measure of the US dollar strength. As such the index is inversely proportional to the performance of EUR/USD. When the index is trending upwards, the EUR/USD should be showing losses. On the other hand, if the USD e.g. USD/CHF is the base currency in the pair, which means you are selling CHF to buy the USD, then the performance of the DXY index will mirror the movements in the pair as well.
As you can see, the DXY index is a very important benchmark for the US economy and the US dollar and forex traders that focus on the major and minor currency pairs i.e. the ones that consist of the US currency – need to monitor its movements in order to make accurate entries.
The month of July hasn’t been very kind to the pair with EUR/USD dropping from 1.12800 to 1.11228. These movements were expected after the ECB decided to stay the course regarding interest rates. Euro to USD exchange rates have deteriorated amid the dollar’s strongest performance yet in almost two years. As the Euro continues to struggle, we can expect the USD to further solidify its earnings and start building an upwards momentum.
Pound to dollar trading has been quite volatile lately – to no one’s surprise. The GBP has been tumbling ever since the 2016 Brexit referendum and the newest Prime Minister election isn’t doing the market sentiment any favors either.
The outlook is bleak for the pound since the downwards pressure is mounting, and the dollar is poised for another surge.
Dollar going strong
As the global economy starts faltering, the US dollar will likely continue to outperform other economies by a large margin as investors flock to the safe-haven currency. While the decision of the Federal Reserve is anticipated to adjust interest rates in order to hit inflation targets, the bank doesn’t seem too eager to go overboard – to the dismay of investors hoping for further economic growth.
President Trump is not too happy with the Fed’s decisions on monetary policy either, as he has been a vocal critic of last year’s rate hike spree and the central bank’s reluctance to lower interest rates.