The US Dollar Index In Spread Betting

Published by Filipe R. Costa on Mon, 18/07/2011 - 17:19
usd graph

Trading shares is not always an easy task. We can have a sense of what is going on in a country by looking at several pieces of data and news indicating the economy is growing, inflation is controlled, retail is over performing other sectors, and so on. But when we are at the firm level, there are many specific characteristics that make a company different from the others even if in the same sector, and there are a large number of events that may affect share prices. Trading broad indices like FTSE 100 is often less risky than engaging in share trading, especially when we use a levered way to trade the markets like spread betting.

Forex trading sometimes suffers from a similar problem. Although currency pairs are influenced by broad market data like equity indices are, the decision on which pair to choose may be very difficult. It may be the case there is a spread of good economic indicators for the US economy that affect the US dollar such that we want to buy the currency. But to buy US Dollars we need to sell other currency. Which currency to sell? The Euro, the Pound, or the Aussie? The pair EUR/USD may be affected differently than AUD/USD. It may also be the case that the USD rises against most of those pairs but in fact weakens against others.

A good solution when we think economic data will boost the USD is to buy the US Dollar Index instead of trying to guess what is the best USD pair to trade. The USD Dollar Index is a weighted composition of six currencies against the US Dollar that include: the Euro, the Great Britain Pound, the Japanese Yen, the Canadian Dollar, the Swedish Krona, and the Swiss Franc. The FED created this index in 1973 to serve as a measure of the value of the US Dollar, and it was adjusted one time coinciding to the introduction of the Euro. Some currencies ceased to exist and were substituted. Basically, the German Mark, the French Franc, the Italian Lira, the Belgium Franc and the Dutch Guilder, were all substituted by the Euro. Besides that single adjustment, the US Dollar Index was never adjusted or rebalanced again. The weights for each currency have been fixed over time at the following percentages:

US Dollar Index Components Table
EUR/USD 57.60%
USD/JPY 13.60%
GBP/USD 11.90%
USD/CAD 9.10%
USD/SEK 4.20%
USD/CHF 3.60%
 

The US Dollar Index roughly reflects the value of the US currency by weighting it against a basket of other currency against which the US dollar is mostly traded. This way, you can use this index instead of looking for a USD pair when you have a sense of what is going to happen to the currency.

Some spread betting providers offer spreads on this index, usually in futures-style, like US Dollar Index September. Capital Spreads is an example of a provider offering trading on this index. It currently quotes the market with a spread of just 3 points.

In order for you to calculate the US Dollar Index from the value of its components, we included a spreadsheet in this article. Download the US Dollar Index Calculator.