It is not a question of the strength of the US dollar, but rather of the weakness of the US dollar

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Over the past month, the US dollar has been on an absolute tear, rising higher and gaining value. Consider this; on september 1 the dollar index hit an intraday low of 91.70, today the dollar index closed today at + 0.45% and is pegged at 94.455. This means that the dollar has gained about 2.755% in value in less than a month. But to delve into recent developments in the dollar index, you need to have a better understanding of the basket of currencies against which the dollar index is trading.According to Investopedia, “The US Dollar Index (USDX) is a measure of the value of the US dollar relative to the value of a basket of currencies of the majority of the United States’ largest trading partners. This index is similar to other trade-weighted indices, which also use the exchange rates of the same major currencies. ”

This basket does not give equal weight to each currency. The basket of currencies includes six currencies that make up the counterpart of the dollar index; Euro dollar, Swiss franc (3.6%), Japanese yen (13.6%), Canadian dollar (9.1%), British pound (11.9%) and Swedish krona (4.2%). By far the most weighted currency that trades against the dollar index is the euro dollar. This single currency constitutes 57.6% of the basket.

With this in mind, it is quite obvious that the movements of the euro will have a big impact on the dollar index. On September 1, the euro traded at a high of just above $ 1.20 for every € 1.00. Today, the euro is trading at $ 1.1610 for € 1.00. This sharp decline in the euro is a major factor in the recent gains of the dollar index.

Currently, Europe is experiencing a second wave of the COVID-19 pandemic. Similar to what the United States is going through, in Europe cases of COVID-19 are increasing dramatically.

According to an article published today by TIME magazine and written by Melissa Godin, “A resurgence of COVID-19 cases has hit countries across Europe, leaving politicians grappling with how to curb the spread of the virus . Governments are now tightening regulations on wearing masks, limiting the number of people who can congregate in public spaces, and focusing on areas where the number of cases is particularly high. ”

This week Europe has seen a record number of new cases reaching 71,365 new cases on September 21, according to the European Center for Disease Prevention and Control. In the UK, Prime Minister Boris Johnson yesterday announced a series of new restrictions. In this country, coronavirus cases are doubling every week.

This is one of the main reasons why the US dollar has gained almost 3% in the past three weeks. Whether the US dollar continues to gain in value will largely depend on the strength or weakness of the three major European currencies which make up a large part of the dollar index basket. These include the euro dollar, the Swiss franc and the pound sterling. If these currencies continue to lose value, it will be because of economic contractions across Europe due to the added restrictions.

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Always wishing you good trading and good health,

Warning: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a solicitation to effect an exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept guilt for any loss and / or damage resulting from the use of this publication.

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