The US Dollar Index (DXY) as an auxiliary indicator for trading in safe haven currencies

The US Dollar Index (DXY) as an auxiliary indicator for trading on safe haven currencies is used less widely as against commodity currencies. Using the US dollar index in trading against commodity currencies can be found here.

The main reason for the low popularity of using the dollar index for trading currency pairs that contain safe assets (JPY, CHF, EUR and gold) is the fact that often the US dollar can also be a safe asset. So, for example, the growth of geopolitical risks or fears of a slowdown in major world economies can support the dollar on a par with the assets of a “safe harbor”.

Therefore, a reasonable question arises: “What is the point of using the US dollar index in trading against safe assets, if they are likely to move in one direction?”. In part, this is so, if not one thing, but which are the risks for the US dollar.

For example, the risks of exacerbation of protectionism in the United States and verbal pressure by US President D. Trump on the US Federal Reserve System have had a noticeable pressure on the dollar while maintaining pessimistic sentiment on the commodity market. As a result, the US dollar index weakened, commodity currencies kept a moderate dynamic, and safe harbor assets showed growth: the Japanese yen, the Swiss franc, gold, and even the euro.

The correlation table of the US dollar index with major currencies confirms the high degree of direct correlation between the dollar index and safe assets.

Dollar Index Correlation Tables

We should also note the dynamics of the index of the dollar and gold, which, despite the very low tabular correlation, have a significant relationship, especially in the absence of risks for the United States. What actually makes the dollar index an excellent indicator for trading in gold.

The graph above shows the dynamics of the US dollar index (Japanese candlesticks) and gold (blue line).

In fact, the US dollar index remains a kind of general indicator of market sentiment and the position of the American currency, which can be used in a variety of usage scenarios, taking into account some features.

Anton Hanzenko