What moves the dollar index in the currency market?

There are several investment vehicles but one of the world largest participants is the U.S. bond market where over $800 billion on average is traded daily and in the worldwide market overall is $80 trillion is traded. When the U.S. session opens early in the morning eastern standard time and the actual data is released from the economic indicators, you will see immediately the volatility in the volume of buying and selling pressures that weigh heavily on the dollar index. An example of this could be – “the country is in an inflationary market pressure or deflationary market pressure. Is there more hawkish or dovish comments from the central banks?” Another example is when following the 10-year treasuries which has a direct relation to the dollar index. This will start a rally on a positive non-farm payroll figure which could cause a better than expected result, therefore a huge surge in demand for U.S. dollars.

Who are the participants? World Governments, i.e. the U.S. Treasuries, Japanese Government Bonds, Euro Bunds, British Gilts; Government pension funds, Hedge funds, Private Equity, institutional investors, and traders. The liquidity in the bond market attracts all broker-dealers and large institutions worldwide.

Why look at the bond market? Other countries buy and sell on a daily basis, which merges throughout all the 4 major market session’s i.e. U.S., Asia, Europe, and London. The volume on these transactions can move the market significantly. For example, Japan would sell the Japanese Yen and buy U.S. dollars to make a purchase of the U.S. bonds. This can fuel the demand for U.S. dollars and the dollar index will appreciate. In turn, the U.S. can sell U.S. dollars and buy Euro’s to make a purchase of the Euro Bunds creating a surge in the Euro currency.

Following the bond market conditions and understanding the data released from the U.S. economic indicators can give you an insight on how the dollar index moves. This is just one of the investment vehicles and a good leading indicator on how the traders sentiment on the market conditions.