STRUCTURE OF THE USDX

The USDX has its own basket of currencies, just like the TWIs. But notice the differences
in the weights between the USDX’s basket and the Federal Reserve’s in Table 8.1.
The question arises of which is better? The answer really depends on how you use
it. The USDX is more popular and provides a trader an accepted way to track dollar sentiment,
though it is less accurate from an economic point of view. When the USDX is
showing a dollar decline, it may be exaggerating the real decline from a global trading
point of view. In Figure 8.2, we can see that as 2006 ended, the dollar had retraced somewhat
on better housing news and was testing a key 50-day moving average. The USDX
chart provides a good way of checking dollar sentiment.
It should be clear that there are many ways to evaluate the dollar. In fact, new measures
are always being introduced. Citigroup recently introduced its own dollar index
called the Citigroup Flow-Weighted Index. This index scrutinizes international capital
flows, which have become an important influence on forex. Additionally, there is the J. P. Morgan Dollar Index, which looks at the dollar in terms of a basket of 18 currencies.
The bottom line is that the forex trader has now an improved ability to answer the
question of how well the dollar is doing in terms of its fundamentals by looking at the
different TWIs of the dollar.




By ABE COFNAS