The US Dollar/Euro Currency Bat Signal

We don’t know what this “Bat Pattern” in the US Dollar and Euro Currency means so close to Halloween, but it’s got us a little scared… (actually it has many managed futures program happy, as they are long the Euro Currency).


Charts Courtesy:
(Disclaimer: Past performance is not necessarily indicative of future results)

Bat Symbol

Now, the Euro Currency is quoted as Euros per USD, so it’s only natural to see it rise when the dollar falls, but US Dollar futures are actually based on the US Dollar Index, not just the dollar versus some other currency (if that were the case, it would simply be the other currency’s futures). The index dates back to the 1970’s, and it measures the U.S. Dollar to six different currencies including: the Japanese Yen, Canadian Dollar, British Pound, Swedish Krona, Swiss Franc, and finally, the Euro Currency.

Ice Futures has a nice explanation of their US Dollar Index Futures here:

What is the U.S Dollar Index?

The U.S. Dollar Index (USDX) is a geometrically-averaged calculation of six currencies
weighted against the U.S. dollar. The U.S. Dollar Index was created by the U.S. Federal
Reserve in 1973. Following the ending of the 1944 Bretton Woods agreement, which had
established a system of fixed exchange rates, the U.S. Federal Reserve Bank began the
calculation of the U.S. Dollar Index to provide an external bilateral trade-weighted average of the U.S. dollar as it freely floated against global currencies.

Which currencies are included in the U.S. Dollar Index?

The U.S. Dollar Index contains six component currencies: the euro, Japanese yen, British
pound, Canadian dollar, Swedish krona and Swiss franc. Before the creation of the euro, the original USDX contained ten currencies—the ones that are currently included (but not the euro), plus the West German mark, the French franc, the Italian lira, the Dutch guilder, and the Belgium franc. The euro replaced the last five of these currencies.

Before the creation of the euro, which now accounts for 57.6% of the USDX, the weightings of the five historical European currencies were: German mark (DEM), 20.8%; French franc (FRF), 13.1%; Italian lira (ITL), 9.0%; Dutch guilder (NLG), 8.3%; and Belgium franc (BEF), 6.4%.

Specifically, the index finds the weighted geometric mean against the six different currencies. However, not each currency holds the same weight. As ICE points out above, the Euro holds a 57.6% weight, while the other weightings are JPY = 13.6%,  GBP = 11.9%, CAD = 9.1%, SEK 4.2%, CHF 3.6%.

So, with the Dollar Index having the exchange rate with the Euro Currency for more than half of its composition, it’s only natural we see US Dollar Index Futures falling while Euro Currency Futures are rising. Indeed, our quick back of the napkin math tells us it would be quite hard, mathematically – for the Dollar Index and Euro Currency to move in the same direction.

So enjoy this bat signal chart/Rorschach test while it lasts – because while you can expect the Dollar Index and Euro Currency to move opposite one another, they won’t always be a mirror image of each other – depending on what the Yen and other currencies are doing.

PS – the Euro Currency is different than Euro Dollars  (see here).

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