What Is Dollar Index And Why Is Their So Much Importance To It?

The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies. It is a measure of the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major 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.
USDX 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. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period. It has since traded as high as the mid-160s and as low as 70.698 on March 16, 2008, the lowest since its inception in 1973.


How Is It Co-related With Commodities?
Here is a graph to show how Dollar Index may co-relate many times, a strong dollar has indicated weak commodities and a weak dollar has given way to strong commodities historically. Just see the crude-dollar index comparison below

What Does Currency Carry Trade Mean?
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.


More Explanation On Currency Carry Trade
It’s simple to understand, and it’s not just hedge funds and international bankers who engage in the trade. Many brokerage firms offer margin loans at near 1% in Japanese yen, which are re-invested by their clients to buy stocks around the world.
The “yen carry” trade is primarily a simple game of interest rate arbitrage.
Step 1: Borrow yen at 0.5% and convert the yen into $9,000 US dollars.
Step 2: With $9,000 from Japan and $1,000 of your own money, invest $10,000 in US Treasury notes at 5.00%.
Step 3: Collect $500 in interest from the US Treasury, and pay $45 to the Japanese lender.
Step 4: Pocket the $455 difference as a profit, for a rate of return of 45.5% on your original $1,000. Step 5: Sell the US Treasury note, and convert the US dollars back into Japanese yen to pay off your loan.
Step 5 is the tricky part, because if the yen were to suddenly surge by 5% against the US dollar, the principal amount of the yen loan would also climb 5% from $9,000 to $9,450, which would wipe out the $455 profit from the interest rate spread.
Carry traders must take on currency risk to play the game, which can go very wrong, if the yen suddenly shoots higher. And that’s what happened in the past when many crises occured and world markets went into a tailspin.


The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.


How has it impacted in the past?
Yen Carry Trade Unwinding the Dow Jones

Carry Trade impacted Brazil Bovespa same way

source:Neelam (google groups)