The DXY index represents a bucket of six currencies weighted as follows... the Euro 57.6%, Yen 13.6%, Sterling 11.9%, Canadian Dollar 9.1%, Swedish Krona 4.2%, and Swiss Franc 3.6%. This design was created by J.P. Morgan in 1973.
Obviously the Euro is the heavyweight. Since the Euro is also a basket of currencies, here is the make-up of the Euro basket. This list shows the old currencies, priced on a day in February 2010, and how much of the old currency is needed to buy 1 Euro.
= 13.7603 AUSTRIAN SCHILLING
= 40.3399 BELGIAN FRANCS
= .585274 CYPRUS POUND
= 5.94573 FINNISH MARKKAS
= 6.55957 FRENCH FRANCS
= 1.95583 GERMAN MARKS
= 340.750 GREEK DRACHMAS
= .787564 IRISH POUNDS
= 1936.27 ITALIAN LIRE
= 40.3399 LUXEMBOURG FRANCS
= .429300 MALTESE LIRA
= 2.20371 NETHERLANDS GUILDERS
= 200.482 PORTUGUESE ESCUDOS
= 166.386 SPANISH PESETAS
= 30.1260 SLOVAKIAN KORUNA
= 239.640 SLOVENIAN TOLAR
The Euro is a complex basket too, though still a single currency. As a 57% weight in the DXY Index, what does watching the index inform about? Isn't it only a gauge of the relative strength of the US Dollar to smaller economies that individually have little to say about the global economy. Together they are strong. In Germany, France and Belgium there are pillars of austerity and therefore strength. As a currency experiment, it is no longer given a spot on the Financial Scanner page. Hat tip to Curious George for raising this question recently.
In its place are other individual currencies reflecting individual economies with unique conditions, relative to the US Dollar. I'll watch the Canadian and Australian dollars because they reflect their commodity and materials industries. Australia exports mainly to emerging markets and Canada to the US. They both manage their financial systems much differently than the US. Specifically, Canada's "conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country", as described in Bill Gross Makes it Clear. Royal Bank of Australia Governor, Glenn Stevens, described post-crisis conditions as "better than expected, it had left the nation with less spare capacity compared to the typical case after a recession. The unemployment rate was low, 5.3 per cent, in January."
There will also be the Yen because it is one of the largest owners of US Treasury debt and seems unable to reflate itself. Axel Merk has this to say in an article titled "Japanese Politics and the Yen", "the yen may continue to benefit despite a continued downward economic spiral. However, the yen may be becoming an increasingly risky proposition because of the unpredictability of Japanese policies and potential Bank of Japan intervention. The yen is likely to continue to be considered a safe haven during times of crisis."
Finally, there is a graph for the Euro because it is a political and economic curiosity that is one of the biggest global trade currencies.
Finally, for inquiring minds, the Axel Merk article linked earlier is an excellent description of what infuences currencies.
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