What is $ Index?
The US Dollar Index (USDX, DXY, DX, or, informally, the "Dixie") is a measure of the value of USD💵relative to a basket of foreign currencies often referred to as a basket of U.S. trade partners' currencies.
1/
🧵on dominant USD💵
USD has been on upward swing since mid 2021 and has jumped sharply more recently
❓What is $ Index?
❓USD💵role in global economy? <- reserve currency
❓Why it is so 'strong' right now?
❓What drive it?
❓Will it collapse?
What is $ Index?
The US Dollar Index (USDX, DXY, DX, or, informally, the "Dixie") is a measure of the value of USD💵relative to a basket of foreign currencies often referred to as a basket of U.S. trade partners' currencies.
🌟The elimination of the gold standard fostered the birth of DXY
🌟DXY was originally developed by US Fed in 1973 to provide an external bilateral trade-weighted avg value of the USD against global currencies
🌟DXY reached its high point in 1985 and its low point in 2008
The following six currencies are used to calculate the index. It is a weighted basket
1⃣Euro (EUR) 57.6%
2⃣Japanese yen (JPY) 13.6%
3⃣Pound sterling (GBP) 11.9%
4⃣Canadian dollar (CAD) 9.1%
5⃣Swedish krona (SEK) 4.2%
6⃣Swiss franc (CHF) 3.6%
What is a Reserve Currency?
⭐️has depth and liquidity to allow reliable & efficient international transactions
⭐️freely and easily exchanged for other currencies
⭐️held by many monetary institutions in significant amounts
⭐️A large % of commodities are priced in it
In 1973 President Nixon's brought an end to the Bretton Woods system of fixed exchange rates. It also decoupled the U.S. dollar from the value of gold.
Why the US Dollar is the Reserve Currency?
It’s currently fashionable to espouse the inevitable end of the💵 as reserve currency. Here are some facts in a🧵I wrote
https://t.co/a43XqjBxix
~90% of foreign currency trading involves the dollar on one side of the transaction
Will the US dollar remain the global reserve currency?
— Mohit \U0001f1ee\U0001f1f3 (@agrawalmohit12) April 13, 2022
It\u2019s clearly fashionable currently to espouse the inevitable end of the US $ as the world\u2019s reserve currency.
Here is a good blog from @EmorningcoffeeC which opines on the issue and some facts belowhttps://t.co/oKCTm8GlWY
Despite trillions of $$ in debt and large deficit spending, the US still holds global trust and confidence in its ability to pay its obligations. For this reason💵will continue to be the top global currency in the years to come
This makes USD exchange rate very important
What are the threats to replacing💵as a reserve currency?
🇨🇳China➡️opening up and allowing the free flow of capital with less government intervention (unlikely)
🇪🇺 EU➡️getting their shit together (unlikely)
Crypto➡️restoring trust in the system (unlikely in the short term)
Underlying supply and demand mechanics drive💵strength. Over simplified key factors:
1⃣The role of bonds
2⃣Economic outlook
3⃣Inflation
4⃣Central bank policy
5⃣Political stability
6⃣Trade balances
Price equilibrium is set where demand and supply meet
1⃣The role of bonds
⭐️US govt issues bonds to raise capital that is then purchased by foreign investors
⭐️'safehaven' <- US has never defaulted on this debt
⭐️foreign investors to sell their currency to buy dollars to purchase bonds
2⃣Economic outlook
When a country’s economy is booming, so are investments in that county. More $ in = higher demand for local currency = stronger currency.
Ex: India (IT and manufacturing) and Taiwan (Semiconductor)
3⃣Inflation
A country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies.
This works in lockstep with central bank policy, which has controlling inflation as part of its mandate.
4⃣Central bank policy
Central banks play an instrumental role in exchange rates due to the interest rate they set. If the interest rate in one country is relatively more attractive than in another, there will be foreign investment inflow into that country.
5⃣Political stability
A collapse in political stability will lead to contagion as confidence is lost in the system.
Srilanka
https://t.co/X2WXgXOqjA
China
https://t.co/Q8XmES2dZW
The US track record for political stability leads it to be viewed as a “safe haven”
#SriLanka is in a mess. The President has resigned, the state machinery has crumbled, the political order has collapsed.
— WION (@WIONews) July 16, 2022
Where is the country headed?
How can the crisis be solved?
What lessons should the world take? @palkisu explains on #GravitasPlus pic.twitter.com/lTxv8aip0s
6⃣Trade balances
When the US exports products or services it creates demand for dollars because customers need to pay for this in the local currency, USD. They will therefore have to sell their own currency to buy USD, which is favorable for the demand for the dollar.
Why is💵so strong right now?
1⃣Fed ended its expansive monetary policy (QT)
2⃣Fed also raised interest rates
3⃣ECB still slow to raise rates
The💵automatically strengthens when the💶weakens - this is because the euro makes up 57.6% of the value of the DXY.
Recent Run-Up in DXY➡️ Supply/Demand factors
It is all relative. The top two constituents of the DXY, Japan and Europe.
1EUR < 1USD
First time since 2002, we now have parity in the EUR and the USD.
Fed has been hawkish to contain inflation while ECB is still hesitant
The dollar is surging: Who wins and who loses?
I wrote a 🧵some time back on this
https://t.co/3JnG06U5VF
The main driver of the recent DXY strength is the central bank monetary policy gap.
The Fed is starting to ramp rates up while the ECB and BoJ are still too hesitant
The dollar is surging: Who wins and who loses?
— Mohit \U0001f1ee\U0001f1f3 (@agrawalmohit12) July 18, 2022
As a mighty dollar ripples through the global economy in profound ways, its impacts are being felt unequally.
source @MorningBrew
Just last week, $ hit 1:1 parity against the \u20ac for the first time since 2002 pic.twitter.com/RXsjlvDIBS
Why the💵wont collapse (different than decline)?
1⃣backed by the U.S. government
2⃣universal medium of exchange
3⃣most international contracts are priced in $$
4⃣US is the largest export market for many countries and these countries have pegged their own currency to the💵
💵Impact on Earnings Season
Lot of companies report in💵but are widespread across all geographies. Currencies affect the bottom lines of companies when exposures are not hedged back to the home currency.
IBM https://t.co/x0IfcbPINs
$MSFT https://t.co/BerCtUjItX
What Is the Petrodollar?
🌟A petrodollar is a💵 paid to an oil-exporting country that cannot be spent on imports for that country.
🌟The 1945 U.S.-Saudi agreement created the petrodollar.
🌟The purchasing power of a petrodollar relies on the value of the U.S. dollar.
Wrap-up ....
In the current state of the💵, monetary policy differentials between the Fed and other central banks and a 'flight to safety' amidst global recessionary fears explain most of the USD appreciation in this recent run.
However, I think the tide is about to change.
If the market is widely expecting a US recession and moderating inflation figures over the next year - these two developments should tighten policy spreads.
💡https://t.co/UGQaiDoGQ9
💡https://t.co/HrQMCAkDTX
💡 https://t.co/5q6Wvb7dL9
💡https://t.co/kBXloUlh5a
💡https://t.co/6NGM6K2dlN
💡https://t.co/JZ5An7XVPg
