The U. S. Dollar Index is an index for currency traders, and it is made up of a geometric weighted average of a basket of foreign currencies against the United States Dollar. The U.S. Dollar Index, the same as stock indexes, gives a general indication of the value of a basket of securities. In this case, the basket holds securities that contain other leading world currencies.

The U.S. Dollar Index has a basket that is made up of six foreign currencies. These are the Euro, the Yen, the Cable, the Loonie, the Kronas, and the Francs. The index is made up of six currencies, however it includes seventeen countries. The reason being there are 12 members of the European Union, plus Japan, Great Britain, Canada, Sweden, and Switzerland. These seventeen countries might just be a small percentage of the countries in the world, but there are many other currencies that follow the U.S. Dollar Index closely. The index is a great tool for measuring the global strength of the United states Dollar.

The components of the U. S. Dollar Index have a geometric weighted average. This is to factor in the fact that not every country is the same size, so each country is given an appropriate weight when the U.S. Dollar Index is calculated. Euros account for a big portion of the U.S. Dollar Index, more than 50 %. The other 5 countries in the basket constitute a combined total of forty three percent of the basket, with euros comprising the other fifty seven percent.

The Federal Reserve uses another type of dollar index, and this is called the trade-weighted U.S. Dollar Index. This index was created by the Feds to more accurately reflect the value of the dollar against foreign currencies according to the competitiveness of U.S. goods in comparison to other countries. The largest difference between these two indexes is the basket of currencies which are utilized and also the relative weights of the currencies. The weights are based on annual trade data, and for this reason it is known as the trade weighted U.S. Dollar Index.

Regardless of which U.S. Dollar Index you are considering, these indexes help Forex traders know the value of the United states Dollar, and the global strength as well. Forex traders make use of these indexes to assist them determine the value of a currency when compared to the U.S. Dollar. There are 2 U.S. Dollar Indexes, and the second one is called trade weighted U.S. Dollar Index. This index is based more on actual trade data, but countries are given weights in this index also.

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