One of the most bullish charts to watch for in the money markets is the US Dollar Index. When US Dollar Index moves above the key support levels of the chart, that indicates strong buying in the US Dollar Index. A lower US Dollar Index will indicate weaker buying and weaker selling in the market. When US Dollar Index goes below the support levels on a downtrend, that means weaker selling and buying.
The strength of the US Dollar Index reflects the strength or weakness of the American economy. The stronger the economy is, the stronger the dollar. That means the dollar will be worth more abroad than it is at present. Thus a stronger US Dollar is a good thing for exporters around the world.
US Dollar Index moves about two times stronger or weaker in relation to other major currencies on a daily basis. Generally speaking, that means that the weaker the US Dollar Index is, the higher the value of the currencies of those nations that use that as their currency. Thus when a nation has a stronger economy than the US Dollar, their currency value will appreciate relative to other currencies. This is a very bullish signal to buy since a stronger US Dollar Index is an indication that exports will fetch a higher price than they may currently pay in the open market. That means more income for the exporting nation.
The bond’s yield is directly related to the strength of the US Dollar Index. As the US Dollar Index rises, the bond yields to a certain level will go up as well. So as bonds yields rise, the cost of borrowing from investors in that nation will go up. Conversely when bonds yields go down, then the cost of borrowing from investors in that nation goes down.
Financial markets all over the globe to follow the movement of the US Dollar Index. The movements are difficult to miss. That is because financial markets are global. In fact, if you were to look at the movement of all world currencies and then look at the US Dollar Index, you would see a very strong green line that is the movement of the US Dollar Index against every other currency. This is what is known as the foreign exchange market or FX.
What makes the foreign exchange market so interesting is its ability to create trends without a visible indicator to indicate when the trend will end. That is why so many people enjoy the foreign exchange market. It is one market that has no visible end, which allows it to develop into something called a trend. A trend can last months to years. Some of the best Forex trading strategies can be used for spotting the beginning of a trend.
When the US Dollar Index goes on a downturn, the bond market contracts and bond yields go up. This causes a powerful bond market rally. There is a large imbalance between the two types of currency pairs. The high-yield bonds usually have higher premiums than the low-yield bonds. When this happens, the prices of both types of bond will go up.
On the flip side, when the US Dollar Index is bullish and rises, the bond market will contract and the yields will go down. This causes a powerful currency rally in the bond market. If you want to trade the foreign bond market, knowing when to trade is important. This is when you can start making profits from your purchase of bonds.
In addition to predicting when the US Dollar Index will go up or down, you can also use technical analysis to analyze the movements of the index. Technical analysis is similar to fundamental analysis in that it looks at the history of the movement of the index. Traders look for trends and price patterns in order to create a strategy for buying or selling currencies. It also helps to understand how currency markets work and what causes them to move.
As with any type of investing, it’s important to understand that trends don’t last forever. Trends come and go, just like anything else in the world. There are instances when the US Dollar Index may make a quick recovery, but then quickly drops again as the global economy responds to whatever events caused it to move in the first place. Understanding when and why these moves may occur is crucial to gaining a strong strategy for using the strength of the bond market to your advantage.
Understanding when the US Dollar Index will react negatively to external factors such as the European debt crisis, the slowing down of China’s economy, and even the slowing of Japan’s economy all play a part in determining the direction of the bond market. Bond market professionals know when particular moves will occur and have developed strategies around these eventualities. When the US Dollar Index reacts positively to economic reports or events, investors jump on the bandwagon and rush to purchase US bonds. When negative news is released, more traders sell US bonds and the bond market drops, creating a domino effect that affects all types of markets.