Should the dollar index (DX) or Dollar spot index (DXY) be used as a leading indicator for EUR/USD price action.
For example, the DX could provide a DOM and volume profile that has a high negative correlation to the EUR/USD pair creating signals based on a bid/ask imbalance.
I use FXCM as a broker and their USD index is a composite of EurUsd, GbpUsd, UsdJpy and (I think) AusUsd… The weight of EurUsd on this index is something like 60%, thus there is a stronger correlation to this pair…
I am not sure about other Dollar indexes, and a comparison among them (and EurUsd) may yield different trading perspectives…
Euro (EUR) 0.576
Japanese Yen (JPY) 0.136
British Pound (GBP) 0.119
Canadian Dollar (CAD) 0.091
Swedish Krona (SEK) 0.042
Swiss Franc (CHF) 0.036
If you remove the Cad and Yen that would be positive coorelation of 77.3 to the EUR/USD pair. Because I would be trading the London and NY session I could remove the Yen’s (13.6%) because of light volume impacting the index. I could then monitor the CAD’s overall direction.
If I were to use the DOM, a volume profile, bid/ask spread analysis for the dollar index would it provide enough context for scalping or am I missing something here?
The U.S. Dollar Index futures contract derives its liquidity directly from the spot currency market, estimated to have turnover of over $2 trillion daily (BIS Triennial Survey, 2013). There is a market maker program to help assure continuous liquidity for the electronic trading of the contracts. The electronic distribution of the futures contract on the ICE trading platform also supports enhanced liquidity. - ICE FAQ
That’s being said, the order book should directly reflect resting orders available provided by the exchanges.
Regarding the Dow Jones FXCM US Dollar Index that PipMeHappy mentioned, that is correct…it is comprised of the Euro, British Pound, Japanese Yen, and Australian Dollar. At inception on january 1, 2011, the value of the index was 10,000 and it represented an equivalent of $10,000 position in each of the currencies that make it up.
The index moves in tandem with the 4 currencies it tracks. For example, if the US dollar rallies 100 pips against each the EUR, GBP, JPY, and AUD, the index will appreciate by approximately 100 points. It’s that simple. Therefore, I don’t see how one could be used as a leading indicator for the other.
On a side note, the index is currently around 12,153 which means the dollar has appreciated approximately 21% since inception in 2011.
I’m unsure if this index would work as a leading indicator because I would need to evaluate its DOM and coorelation. The DX index may be more useful in this regard.