U.S. Dollar Index Jun '19 (DXM19)
|Contract||U.S. Dollar Index|
|Tick Size||0.005 points ($5.00 per contract)|
|Contract Size||$1,000 times Index|
|Trading Months||Mar, Jun, Sep, Dec (H, M, U, Z)|
|Trading Hours||7:00p.m. - 4:00p.m. (5:00p.m. Sunday) (Settles 2:00p.m.) CST|
|Value of One Futures Unit||$1,000|
|Value of One Options Unit||$1,000|
|Last Trading Day||The second business day prior to the third Wednesday of the expiring month|
A "currency" rate involves the price of the base currency (e.g., the dollar) quoted in terms of another currency (e.g., the yen), or in terms of a basket of currencies (e.g., the dollar index). The world's major currencies have traded in a floating exchange rate regime ever since the Bretton-Woods international payments system broke down in 1971 when President Nixon broke the dollar's peg to gold. The two key factors affecting a currency's value are central bank monetary policy and the trade balance. An easy monetary policy (low interest rates) is bearish for a currency because the central bank is aggressively pumping new currency reserves into the marketplace and because foreign investors are not attracted to the low interest rate returns available in the country. By contrast, a tight monetary policy (high interest rates) is bullish for a currency because of the tight supply of new currency reserves and attractive interest rate returns for foreign investors.
The other key factor driving currency values is the nation's current account balance. A current account surplus is bullish for a currency due to the net inflow of the currency, while a current account deficit is bearish for a currency due to the net outflow of the currency. Currency values are also affected by economic growth and investment opportunities in the country. A country with a strong economy and lucrative investment opportunities will typically have a strong currency because global companies and investors want to buy into that country's investment opportunities. Futures on major currencies and on cross-currency rates are traded primarily at the CME Group.
Dollar - The dollar index (Barchart.com symbol DXY00) fell to a 4-year low in early 2018 but then rallied through the remainder of the year and closed 2018 up +4.4% yr/yr. The dollar's rally in 2018 was limited and the dollar index was unable to fully recover the 2017 sell-off and indeed remained well below the 16-year high posted in early 2017. The dollar index was supported in 2018 by the strong U.S. economy and by the four interest rate hikes by the Federal Reserve. The U.S. economy in 2018 showed strong GDP growth of +2.9% due to the stimulus from the massive personal and corporate tax cuts that took effect on January 1, 2018. Meanwhile, the Fed during 2018 raised its federal funds rate target by a total of one percentage point to a new range of 2.25%/2.50% by December 2018. That sharp one percentage rate hike, compared with no rate hikes by Europe or Japan, produced a big improvement in the dollar's interest rate differentials, which was a major supportive factor for the dollar index. The Fed also tightened monetary policy during 2018 by reducing the size of its balance sheet, thus tightening liquidity. However, the dollar's rally ran out of steam late in 2018 as it became clear that the Fed would have to halt its rate-hike regime in response to the slowing global economy and the steep downward correction in stocks seen in Q4-2018. Indeed, the Fed at its meeting in January 2019 dropped its guidance for higher interest rates and moved to a neutral policy, thus undercutting the dollar index.
Euro - EUR/USD (Barchart.com symbol ^EURUSD) posted a 4-year high in early 2018 on an extension of the rally seen in 2017. However, EUR/USD then faded during the remainder of 2018 and closed the year down -4.5% yr/yr. EUR/USD was generally weak during 2018 as the European Central Bank (ECB) maintained a highly stimulative monetary policy while the Federal Reserve was in the process of raising U.S. interest rates by one percentage point. The ECB tapered its quantitative easing program during 2018 and ended the program altogether in December 2018, which was a supportive factor for the euro. On the interest rate front, however, the ECB was forced to promise that it would not raise interest rates until at least summer 2019, a promise that the ECB in early 2019 then extended to the end of 2019. The Eurozone economy weakened during 2018 in response to (1) trade tensions, (2) a temporary downdraft in the German auto industry in Q3, and (3) a technical recession in Italy in the second half of 2018 due to the high bond yields that resulted in early 2018 from the populist Italian government's attempt to implement a deficit-busting budget that was rejected by the European Commission.
Yen - USD/JPY (Barchart.com symbol ^USDJPY) fell to a 2-year low in early 2018 but then recovered to close the year down -2.6% yr/yr, meaning that the yen closed the year up +2.6% against the dollar. The yen showed weakness in 2018 from April through September since the Bank of Japan maintained its extraordinarily easy monetary policy all during 2018 while the Federal Reserve raised interest rates. The Bank of Japan during 2018 continued the policy it adopted in September 2016 of yield-curve control (YCC) where it targeted the 10-year Japanese government bond (JGB) yield near zero and its short-term policy rate at -0.1%. The yen therefore suffered from very poor interest rate differentials against the dollar all year. However, the BOJ did engage in some stealth tapering of its bond-buying program since not as much bond buying was necessary to keep the 10-year JGB yield near its target of zero, which was a supportive factor for the yen. The yen was also supported late in 2018 by some flight-to-quality buying as the global stock markets took a steep dive in late 2018.
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