The U. S. Dollar has continued to fall hitting a low of 92.72 on Monday, July 31st. The U. S. Dollar also broke through shorter term support levels and is now closing in on long term support that could very well define the longer term trend over the next several years.
When most financial writers (to which I include myself) refer to the U. S. Dollar they are typically referencing the DXY index. The DXY index is composed of 6 currency pairs that are based mostly in Europe. The Euro vs. the U. S. Dollar makes up 58% of the DXY index with the Great British Pound, Swedish Krona and Swiss Franc making up an additional 19.7% of the index combined.
What this means is that the DXY Index, which is widely cited as the ‘U. S. Dollar’, is really a basket of currencies as measured against the U. S. Dollar. 77% of this DXY Index are European currency pairs. The U. S. Dollar vs. the Canadian Dollar and the U. S. Dollar vs. the Japanese Yen make up the remaining 23% of the index. This leaves a vast number of countries not represented at all within the DXY Index.
It is still useful to track the DXY as it is still a widely used barometer of the strength of the U. S. Dollar. The lack of diversity within the index does at times lead to divergences of currency pairs that are inside and outside of the Index. We can often use how much divergence is being seen in the DXY index to help to gauge the overall strength of the trend.
The month of July saw some increased divergence with the component pairs of the DXY Index. This was in comparison to the relative lack of divergence that was seen from the January top into the August lows.
This post was published at GoldSeek on 2 August 2017.
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