Weak US Dollar Index Doesn't Equal Weak USD

10/01/2013 9:00 am EST

Focus: CURRENCIES

Jim Martens

Editor, Currency Pro Service

You are missing out if you are just looking at the US Dollar Index without looking at the individual dollar pairs, says Jim Martens of ElliottWave.com’s Currency Specialty Service.

The US Dollar Index measures the value of the US dollar against the basket of six other major currencies, which are:

    •Euro (EUR), 57.6% weight
    •Japanese yen (JPY) 13.6% weight
    •Pound sterling (GBP), 11.9% weight
    •Canadian dollar (CAD), 9.1% weight
    •Swedish krona (SEK), 4.2% weight
    •Swiss franc (CHF) 3.6% weight

Now, a question. If you are bearish (or bullish) on the Dollar Index, does it mean you are expecting the dollar to fall (or rise) relative to all its forex competitors? The answer is no.

We must keep in mind that the US Dollar Index is trade-weighted, and its trend alone might not reflect the USD's true performance.

In other words, just looking at the US Dollar Index without looking at individual dollar pairs might not accurately reflect all of the available forex opportunities. Let’s look at a fresh example.

On Friday (Sept. 27), the US Dollar Index turned lower (as we expected). Yet the US dollar has not fallen against every currency. Not even against every US Dollar Index component.

We have been expecting USD weakness relative to EUR, GBP, and CHF. They account for 70%+ of the Index.

At the same time, we have been bullish on the USD relative to these two US Dollar Index components: JPY and CAD. However, they account for just a bit over 20%.

Indeed, the USD has been weaker relative to the euro, sterling, and Swiss franc. It's the weighting of those three US Dollar Index components that has kept the Index under pressure. But the dollar has not fallen against all currencies on Friday. It gained relative to the commodity currencies—the Australian dollar and Canadian dollar—and has held its own relative to the Japanese yen.

So, the US Dollar Index weakness does not mean the US dollar weakness across the board.

It's this mixed performance that makes it imperative to extend our market study beyond the Dollar Index.

By Jim Martens of ElliottWave.com’s Currency Specialty Service

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