The U.S. Dollar Index measures the value of the United States Dollar relative to a basket of foreign currencies. This “basket” includes the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
Not all the currencies have the same weight. Below are the weightings of each currency:
- Euro (EUR) 0.576
- Japanese Yen (JPY) 0.136
- British Pound (GBP) 0.119
- Canadian Dollar (CAD) 0.091
- Swedish Krona (SEK) 0.042
- Swiss Franc (CHF) 0.036
Unlike the various FX pairs that we trade on our platforms, the U.S. Dollar Index is exactly what it says it is, an index. It does not reflect the spot price of the currency. Rather, it reflects the price of the Index traded on the ICE Exchange, in New York. Therefore, these contracts are subject to rollover four times a year.
What Has Been Happening with the Dollar?
Initially, after the Friday Employment Report came out, the Dollar rallied, as figures showed that job creation in the U.S. surged in January. However, a smaller than anticipated rise in January wages sent a contrary signal, and the dollar gave up earlier gains against the Euro and the Japanese Yen. The cooling in wage growth also decreased the likelihood of more near-term interest rate hikes from the Federal Reserve. In fact, following the U.S. January jobs report, the odds of a rate hike in March actually fell. It had been the expectation of a rate hike that supported the greenback during the second half of 2016.
While the Dollar is at a point that many have felt would be attractive for long-term investors, some feel that we are witnessing a foreign exchange policy shift in the U.S.
Currently, the market fears Donald Trump’s recent criticizing of Japan and China for manipulating their currencies to boost their global competitiveness. He even suggested that Germany is exploiting a “grossly undervalued” Euro. These comments, and comments by the nominee for Secretary of Treasury Steven Mnuchin, suggest that the administration might be ready to give up the “strong dollar” policies advocated by previous administrations for the past twenty years.
Similarly, a speech by British Prime Minister Teresa May, stating that despite Brexit, the U.K. desires to keep close ties with the rest of Europe weighed on the Dollar. This caused the Pound to rebound, with the Euro going up in sympathy.
Additionally, the Index has been weak as people fear the impact of President Trump’s policies on other markets. “Safe havens,” like gold and Bitcoin, have been the beneficiaries of these fears.
On the other hand, the interest rate differential has been widening in favor of the U.S. for the second straight week after a five-week period of narrowing. If this continues, the Dollar should gain better footing.
We must remember that the Dollar is the reserve currency of the world. The U.S. remains the most stable nation from both a political and an economic perspective. This should underpin the value of the Dollar.
Certainly, with President Trump now in command, there is a direct correlation between the give and take of politics and economics, and the twists and turns of the foreign exchange markets.
Key reports coming out this week are as follows:
- The Reserve Bank of Australia (RBA) meets on Tuesday, February 7. It is anticipated that the RBA will not make any changes at its February meeting.
- Canadian and American trade balances will be published on Tuesday, February 7.
- China is also due to release its trade balance on Thursday, February 9.
- On February 10th, we get the Michigan Sentiment Index, a survey of consumer confidence.