To do that, it must really have something spectacular. The world doesn’t need another index unless it’s all-out better than what they already have.
My take is that this one is better in some respects, but not enough.
Like most currency indexes, the new index measures the dollar against a basket of other major currencies. In this case, it’s the euro, yen, U.K. pound, Australian dollar, Canadian dollar, Swiss franc and Swedish krona.
The WSJ index adds one additional major – the Australian dollar – that the most-watched index out there, the ICE U.S. Dollar Index (USDX), does not have. It’s a shortcoming for ICE, as the Aussie/U.D. dollar has been among the most traded currencies in recent years, due to its strong ties to China and the commodities markets.
There is a big difference in philosophy between the new WSJ index and the ICE.
The advantage ICE touts is that its composition has only changd once since it was introduced in 1973, and that was when the euro was launched in January 1999. Even then, the net representation of the European legacy currencies remained fixed at 57.6%.
Keeping the currency weights fixed over a long period of time has arguably allowed for apples-to-apples historical comparisons for those who want to chart the performance of the index.
ICE is not accurately reflecting the changing FX world, the folks at Dow Jones argue. And perhaps that is true.
That’s why the WSJ Index plans to rebalance the currencies at 3-year intervals, using the broadest data set out there, from the Bank of International Settmements. That, in theory, would offer a more complete and up-to-date picture of FX volumes.
So which FX index is really better?
That depends entirely on what you really want a dollar index to do.
If your goal is to track forex volume data, this index falls way short. For that, you are going to head over to Reuters. It tracks volume data on 54 currency pairs in real time, and track 1,100 subscriber banks that trade through Reuters (TRI) systems – which to my understanding is up to 70% of the market. It’s certainly enough to be a very accurate and representative sample. And, my goodness, it’s real time. So for me, forex is still the one market where Reuters data has a clear advantage, and a new index from Dow doesn’t change that.
And if the goal is to offer forex markets something that investors in other markets can track to gauge dollar movements, which have a strong bearing on equities, I don’t see anything from the new WSJ Index that clearly will threaten ICE.
So bottom line, I cannot see the market getting excited about this.
It’s a different mousetrap, not entirely a better one.
Photo by: Andrea Guerra