stock here: I have reduced literal cash holdings, as I wanted to be able to be more nimble and do things like hold foreign dividend generating “stocks” in the home currency. With all that, the study of the elephant in the room, the USD is important.
————————————————– A-Eye
The charts shown in the image represent the currency pairs relative to the U.S. dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swiss Franc (CHF), Australian Dollar (AUD), and New Zealand Dollar (NZD). These charts are common in financial platforms like Finviz to track currency price movements in real-time, usually through candlestick charts that display open, high, low, and closing prices over a specified period.
Nature of Currency Representations:
The charts show the relative strength or weakness of these currencies against one another, typically in terms of their exchange rates to the USD or to another major currency. These rates are determined in the global foreign exchange (Forex) market, where currencies are bought and sold.
Each chart shows the movement of one currency relative to another, such as USD vs. EUR or GBP vs. USD, and is based on market supply and demand for those currencies. Traders use these charts to speculate on price movements, hedge against risks, or perform arbitrage.
On DXY and Its Limitations:
The DXY (U.S. Dollar Index) is a measure of the value of the U.S. dollar relative to a basket of six major world currencies:
Euro (EUR) – 57.6% weight
Japanese Yen (JPY) – 13.6% weight
British Pound (GBP) – 11.9% weight
Canadian Dollar (CAD) – 9.1% weight
Swedish Krona (SEK) – 4.2% weight
Swiss Franc (CHF) – 3.6% weight
The issue you pointed out about DXY not being fully representative of the U.S.’s true trading relationships is valid. This is due to several factors:
Eurocentric Bias: The Euro has a disproportionate weight in the index (around 57%), while major U.S. trading partners, such as China (with the Yuan), Mexico, and other Asian and Latin American countries, are not included in the DXY.
Volume and Notional Value: The DXY does not reflect the actual volume of currency traded or the notional value of global transactions in relation to the U.S. dollar. For example, the Chinese Yuan (CNY) is one of the largest trading currencies globally due to the sheer size of U.S.-China trade, yet it is not part of the DXY.
Outdated Basket: The DXY basket was created decades ago, and while the currencies included were significant trading partners at the time, global trade patterns have shifted significantly since then.
Alternative Metrics:
To address the limitations of the DXY, other more comprehensive indexes have been developed:
Trade-Weighted U.S. Dollar Index: This is a broader measure, including more currencies weighted by the amount of trade the U.S. does with each country. It offers a more accurate reflection of the U.S. dollar’s performance relative to its actual trading partners.
Bespoke Currency Baskets: Financial institutions may also create custom indexes to track the U.S. dollar against a basket of currencies based on trade flows, GDP, or other economic indicators, to better reflect economic realities.
Conclusion:
The Finviz currency charts give traders and analysts an intuitive way to track price movements, but broader measures like the DXY can sometimes be misleading due to their outdated structure. Modern tools such as the Trade-Weighted Index offer a more precise reflection of the U.S. dollar’s real position in global trade.