Sunday, November 15, 2009

Understanding the Dollar Index

CNBC-TV18 anchors, mainly Udayan and Mitali, track the Dolalr Index every day. In the last few days, the Index hit 75, which was the lowest since August 2008. The lowest level of the Index is 70.70 in Mrach 2008.

Now, the Dollar Index is actually a basket of currencie against which the value of the Dollar is measured. There are six currencies but the Euro is the most important. Here are the weights:

Euro = 57.6%

Japanese yen = 13.6%
British pound = 11.9%
Canadian dollar = 9.1%
Sweden krona = 4.2%
Swiss franc = 3.6%

So, the Dollar Index is heavily influenced by the Euro, and, remember that the Swiss Franc is closely related to the Euro so the influence is actually more than visible.

When the Dollar rises in value to the currencies listed above, the Dollar Index moves up. The Index measures the strength of the dollar.When the Dollar Index falls, it means that the Dollar is getting weaker. (As the Index falls, I.T. stocks in India face heavy weather because the Rupee may be getting stronger.)

Anticipation of a weak dollar pushes money into emerging markets. The arithmetic goes something like this: One dollar fetches Rs 48. So an investor sells his dollar, buys the Rupee and invests Rs 48 in Indian stocks. Let us say that the market remains where it is. The dollar becomes weaker and now fetches only Rs 44. The Investor can sell his shares for Rs 48 and buy 1.1 dollar (approx) and send this money back. Therefore, a weak dollar encourages movement of capital to emerging economies.

The reverse will be true if the Dollar begins to appreciate.

Below is the chart for the Dollar Index. At Technical Trends, we provide data for this and many other international instruments.




Here is the weekly chart, giving a long term perspective.



7 comments:

gourv said...

Hello SIR,

Can we trade the dollar index..??

Regards
Gourav

kk said...

RESPECTED SIR,
AS WE SEE THERE IS HUGE DIVERGENCE IN THE WEEKLY CHARTS OF DOLLAR INDEX BUT DOES THIS INDICATE THAT THERE IS GOING TO BE A REVERSAL ANYTIME SOON? I AM NOT SURE.

"EVERY THING" "EVERY STUDY" "EVERY INDICATOR" HAS SOME LIMITATIONS. AND THAT'S WHERE THE LIMITATION OF TECHNICAL ANALYSIS STANDS, BECAUSE I WAS STUDYING THE CHART OF "UNITECH". RIGHT FROM FEB 12 2008 WHEN IT WAS ABOVE 300, IT STARTED SHOWING POSITIVE DIVERGENCES WITH ALMOST EVERY INDICATOR, IF ANYBODY AT THAT POINT RELIED ON IT ,HE WOULD HAVE LOST HIS 92% OF HIS MONEY.
AND THAT'S THE SAME THING WITH DOLLAR, UNLESS OR UNTIL THE FED IS CONTINUING WITH IT'S EASY MONETARY POLICY THERE IS NOTHING GOING TO HAPPEN WITH DOLLAR.

SIR,FRIDAY WAS AMAZING AS FAR AS AMERICAN MARKETS WERE CONCERNED. TWO MOST IMPORTANT DATAS CAME IN, THE CONSUMER SENTIMENT , AND INTERNATIONAL TRADE DATA AND BOTH OF THEM WERE EXTREMELY NEGATIVE BUT THE MARKET WENT UP IN AN ANTICIPATION THAT NOW THE "ECONOMIC DATA" IS WEAK, THE FED WILL HAVE TO KEEP INTEREST RATES LOW FOR AN EXTENDED PERIOD. THAT'S HOW THE MARKET CHANGES IT'S COLOR.

SO THAT'S MY ANALYSIS,

SIR AS I AM NEW IN MY CAREER I REALLY NEED YOUR SUPPORT AND COMMENTS ON IT.
WITH REGARDS.

tushki said...

sir pls suggest chart pattern for unitech??

gurvi said...

Hello Sudarshan ji,
For Day Trader:-
What is the crieteria for the stock selection?
Which indicator to use for day trading?
How to deal with the day trade profit? Shall the profit be invested back into the stock or keep aside some profit out and invest the rest? In general how to deal with the profits?

Thanks!!!
Gurvi

men said...

Gurvi,
Keep milking out your capital first, use this money for the rainy day when u r stuck. The larger your capital the greater will be the RISK.
Regards,

men said...

Hi Danish,
Thanks for the update, keep posting the same, it really helps me at least.
Regards,

gourv said...

Hello Sir,
Gourav again here.HEDGE FUNDS in US do recuirt MBA students from INDIA.DO they trade for them?
IS it possible to do MBA from a good institution and get a job where one will be doing actual trading for the company???
Please advice

Regards
Gourav