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Foreign Exchange

FX news: New dollar index from CME/DJ - a threat to DXY?

Up until now the only dollar index future with tradable liquidity has been the US dollar index future (DXY) traded on the Intercontinental Exchange (ICE). This may now change with the announcement of the Dow Jones CME FX$Index.

The index is expected to launch in the third quarter of 2010, which I imagine means by Labor Day settlement, and will be tradable as a future on the Chicago Mercantile Exchange. The index represents a basket of the most traded CME FX futures (AUD, GBP, CAD, EUR, JPY and CHF) all traded against the USD. The basket weightings are fixed, having been weighted to world trade and rounded for ease of hedging; specifically, 10 FX$Index contracts are equivalent to a basket of currency futures comprising of 4 EUR, 2 GBP, 2 JPY, 1 AUD, 1 CAD, and 1 CHF contracts. The index will be calculated as the basket value divided by USD10,000 and inversely quoted: when USD strengthens against the basket, the index will go down and when the dollar weakens, the index will go up.

The rounded currency weightings are a key point; the CME has foreseen a demand to hedge or unhedge specific currencies within the basket and points out that the index will be cross-margined with the component currency futures.

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