US Dollar Index – Can We Use it As a Benchmark For Overall Market Direction in Forex Trading?

How good is the US Dollar Index for forex traders? Can you use it like the stock indexes DOW JONES and the S&P 500 as a benchmark for the overall market direction. The conventional wisdom in stock trading is to find the direction of the market from one of the indexes like the DOW or the S&P 500, find the strongest sector and finally winnow down to the strongest stock in the sector. The premise is this that a rising tide lifts all boats!

Can we use the US Dollar Index in forex trading like the the stock indexes in stock trading? Most probably not. US Dollar index is a totally different animal. If you ask any economist how good is the US Dollar Index, he may say it is no good. Since 1999, when the EURO replaced 12 European currencies, US Dollar Index (USDX) hasn’t changed much.

Now USDX is comprised 73% of European currencies. This limits it’s usefulness as a benchmark comprised of basket of currencies. So it may not be good at representing USDJPY currency pair or perhaps any other currency pair involving USD apart from USDEUR to some extent. What we can say is that it has uncertain value in trading individual currency pairs.

However, it may have a limited value in trading commodities like the gold and crude oil. But there is a US Dollar Index Indicator that you use to predict the market direction. Watch this video that shows two powerful indicators that can change the way you have been trading forex!

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