How significant to watch US Dollar Index for a commodity traderWhat is Dollar Index

The US Dollar Index is an index (or measure) of the value of the United States dollar relative
to a basket of foreign currencies. It is a weighted geometric mean of the dollar's value
compared only with-

Euro (EUR), 57.6% weight

Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight

Generally dollar index goes up when US Dollar gains against other currencies. It a indication of
US Economic activity or any other activity which can strengthen or weaken US dollar.
It was started in March 1973, soon after the dismantling of the Bretton Woods system. At its
start, the value of the US Dollar Index was 100.000. It has since traded as high as 148.1244
in February 1985, and as low as 70.698 on March 16, 2008. The makeup of the "basket" has
been altered only once, when several European currencies were subsumed by the Euro at the
start of 1999.

How it affects commodities Move

Commodities typically follow and inverse relationship with the value of the dollar. When the
dollar strengthens against other major currencies, the prices of commodities typically drop.
When the value of the dollar weakens against other major currencies, the prices of
commodities generally move higher.
Dollar Index and Gold

Dollar Index and Copper

Dollar Index and Crude Oil

You can see from the chart how this inverse relationship works. The green line represents the
price of the dollar index, which is the value of the dollar against a basket of other major
currencies. The blue line is the loco Gold, LME 3m Copper and Nymex Crude Oil continuous
Weekly chart.
As the dollar moves higher, commodities generally move lower. The opposite happens as the
dollar moves lower. It is not a perfect correlation, but it is fairly close.
There are many reasons why the value of the dollar has an impact on commodity prices. The
main one is that commodities are priced in dollars. When the value of the dollar drops, it will
take more dollars to buy commodities.
Another reason is that commodities are traded around the world. Foreign buyers will purchase
US commodities or Dollar denominated.
When the value of the dollar drops, they will have more buying power and simple economics
tells us that demand typically increases as prices drop.
Commodity traders often keep a close eye on the value of the dollar. The price of the index is
traded like any other futures contract and you can get quotes throughout the day.

Commodity prices dont necessarily tick higher for every tick lower in the Dollar Index, but
there is a strong inverse relationship over time. Individual commodities can also buck the
trend if other overwhelming forces are causing the price to move along with the dollar.
Technical Analysis of Dollar Index
On weekly chart Dollar Index has broken major support line and same time we have seen all
major commodities are trading as their 6 month higher levels. Dollar index is expected to
remain negative, major support is seen around 78.40. Currently its trading near 80.27.

If market doesnt sustains here and bounce back above 81.40 then we can a sharp rally from
current levels, same time we might witness a sharp correction in Gold, Copper and Crude
prices.
Regards,
Kamlesh Jogi
Sr Technical Analyst
Fortune Financial Services India Ltd.

Mail

kamleshjogi@ffsil.com