The Euro and US dollar exchange rates have been declining against the Japanese Yen following the release of stronger than expected GDP data by Japan. The rise in the USDJPY pair has made it nearly impossible for the dollar to maintain its value, causing an overall fall in markets globally. This was all seen as a reaction to Japan’s strong GDP numbers which improved from 1.0% in Q1 to 1.5% in Q2, thanks mainly to increased consumer spending and exports.
The US Dollar Index fell 0.3% on Thursday morning after the release of disappointing EU Industrial Output figures that saw a contraction in manufacturing output for both April and May, yet remained stable for June at 0%.
Despite the negative surprises from the French and German services sectors, the better than expected GDP data in Japan raised hopes that European economies are likely to be beneficial for the euro after recent weakness in US economic data.
What is DXY:
The DXY series is the best known and most used dollar exchange rate index which is used as the reference for trading this currency pair because it provides a simple, comprehensive and widely accepted gauge for tracking changes in the greenback against major currencies. It is simply put, a reference rate that any trader or forex dealer would need to use as a benchmark when dealing with the dollar versus other currencies.
What are the pros?
1) It’s simple to understand. Although other currency indices such as a Euro/Dollar index or a EUR/USD index both come with their own advantages, proper research prior to investing in any of these may prove tough if not impossible. This is because the key indices used to measure the strength of the dollar against other major currencies are more easily understood and more closely tracked.
2) It’s easy to hedge. All forex traders know that hedging a currency position is usually the safest course of action in preventing huge losses. While this is often done in the case when a trader expects a single currency to drop or appreciate against another, it is still quite difficult for massive hedging for FX traders due to risk and time factors. However, with a relatively simple way to hedge the USD in order to prevent huge losses, traders could focus on maximizing profit potential for each trade opportunity instead of worrying about protecting their position.
What are the cons?
1) It doesn’t reflect underlying market fundamentals. Since USD trading is often used as a barometer for risk appetite and speculation, this index may not accurately reflect underlying fundamental strengths and weaknesses present in the U.S. economy and dollar depreciation against other currencies.
2) It may not be accurate at times. Despite being used as an FX benchmark for a long time, this index might not always reflect the underlying realities of the global economy. This is due to factors such as market speculation, volatility or even a simple change in sentiment which could affect the value of this index.
What’s next?
The Euro and US Dollar exchange rates have both been trending down for most of this year and there doesn’t seem to be any indication that things will improve soon. The US dollar has been hit by concerns that growth in the world’s largest economy isn’t going to improve anytime soon and that the Federal Reserve may be forced to delay any plans for future rate hikes.
In addition, the dollar has also been falling against the yen after Japan revised its Q2 growth forecasts to 0.7 percent from 0.8 percent in May, due to impacts of adverse weather and a slowdown in exports. This means that the Yen is benefiting from the weakness of the dollar as it is currently trading higher than its level a month ago. It also means that there were two reports of disappointing GDP data on Thursday which made market sentiment more bearish towards the USD.
