Let’s start with a brief history.

The US Federal Reserve created the Dollar Index, nicknamed the Dixie, in March 1973 shortly after the dismantling of the Bretton Woods agreement. In its early days, the base value was 100 and values ​​since then have been relative to the base.

It is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE).

The calculation behind the Dixie is a basket of the exchange rate of six currencies:

  • The euro (EUR) represents 57.6% of the basket.
  • The yen (JPY) with a weighting of 13.6%.
  • Cable (GBP) at 11.9%
  • The Loonie (CAD) at 9.1%.
  • The Swedish krona (SEK) at 4.2%.
  • The Swissy (CHF) at 3.6%.

These six currencies included in the Dixie are generally referred to as America’s most important trading partners. The index has only been updated once: in 1999, when the euro replaced the German mark, the French franc, the Italian lira, the Dutch guilder and the Belgian franc.

The value of the index is a good indication of the value of the Dixie in world markets.

Let’s look at the technical details as the price is showing early signs of movement not seen since 2000.

Below is the Dixie’s monthly schedule.

The price has been trading inside a range since 2015. Recent price action has seen the price move 18% from $90 in January 2021 to $105 on Friday. This is the first time we have seen the price hit this level in a bull run since 2000.

What does this mean for investors?

This exit from consolidation could be significant for investors. We may be seeing the first signs of renewed strength towards the 2001 high at $122.

If this happens, then we will see trends emerging on the major dollar pairs: AUDUSD, EURUSD, GBPUSD, NZDUSD, USDCAD, UDCHF and USDJPY. The minor pairs USDSEK and USDDKK will also be attractive.

The last time we saw sustained trends in dollar pairs was in 2014-2015. We are due for a profitable period.

What is my current position?

First of all, I don’t trade the Dollar Index. I prefer to use it as an indicator of market conditions and then add the currency pairs that show the most potential to my portfolio. This is how I use the S&P 500 for the stock market and Bitcoin for cryptocurrencies.

Looking at these recent moves, it’s tempting to jump at opportunities when we see impulsive moves, but this will leave you open to false breakouts. This can often happen when the price breaks out of a long-term consolidation zone for the first time, which will lead to losses. Being patient will help avoid this.

For now, I continue to monitor the markets. Once the Dixie confirms its upward strength, I will then start adding the currency pairs with the best setups to my portfolio.

I will make up for lost time by dialing strategically as the trend develops.

Has this beast of the market finally woken up? Only time will tell.

In my future articles, I will take an in-depth look at the major currency pairs mentioned above.