By Mike Golembesky – Re-Blogged From http://www.Gold-Eagle.com
The US Dollar has continued to fall hitting a low of 92.72 on Monday, July 31st. The US Dollar also broke through shorter term support levels and is now closing in on long term support that could very well define the longer term trend over the next several years.
When most financial writers (to which I include myself) refer to the US Dollar they are typically referencing the DXY index. The DXY index is composed of 6 currency pairs that are based mostly in Europe. The Euro vs. the US Dollar makes up 58% of the DXY index with the Great British Pound, Swedish Krona and Swiss Franc making up an additional 19.7% of the index combined.
What this means is that the DXY Index, which is widely cited as the “US Dollar”, is really a basket of currencies as measured against the U.S. Dollar. 77% of this DXY Index are European currency pairs. The US Dollar vs. the Canadian Dollar and the U.S. Dollar vs. the Japanese Yen make up the remaining 23% of the index. This leaves a vast number of countries not represented at all within the DXY Index.
It is still useful to track the DXY as it is still a widely used barometer of the strength of the U.S. Dollar. The lack of diversity within the index does at times lead to divergences of currency pairs that are inside and outside of the Index. We can often use how much divergence is being seen in the DXY index to help to gauge the overall strength of the trend.
The month of July saw some increased divergence with the component pairs of the DXY Index. This was in comparison to the relative lack of divergence that was seen from the January top into the August lows.
The US Dollar rose close to 1.6% against the Swiss Franc in July while the Index as whole moved down 2.39%. The Pound and the Yen also underperformed the DXY Index but did still move in higher against the US Dollar in July. The Canadian Dollar and the Swedish Krona outperformed the DXY Index with the U.S. Dollar vs. the Canadian Dollar dropping over 4% in July.
The price levels of the index do take precedence over all other indicators, divergences can still be useful. Currently, the increase in divergence does fit with the expectation that we should be close to either a corrective bounce or consolidation on the DXY. If and when this bounce/consolidation does occur I would expect the divergences in the component pairs of the DXY to continue to increase.