- 1). Understand that the U.S. dollar index is a measure of the relative strength of the U.S. dollar in comparison to other major currencies. It is calculated using a trade-weighted index methodology, which is similar to the way most market indexes are calculated.
- 2). Understand how the index is calculated. The index factors in the exchange rates for six major world currencies: euro, yen, cad, pounds, krona, and Swiss francs.
- 3). Understand how to interpret the index.The index was started at a base of 100 in 1973. An index value of 130 suggests that the U.S. dollar has increased by 20 percent in value since 1973.
- 4). Use the U.S. dollar index value to help provide information about the direction of a particular currency. Look at the 52-week high and low for the index. Take note of the date of the high and low and where they are in contrast to the current price.
- 5). Chart a moving average of the index over the past three months and then chart another moving average over six months and 12 months. The three-month chart will be more volatile than the six-month; likewise the six-month chart will be more volatile than the 12-month chart.
- 6). Use the moving average charts of the index to find buy and sell points. When the three-month chart breaks out of the six- or 12-month moving average line it can be used as a signal to enter or exit the market depending on your strategy.
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