As reported in the Journal this morning, the new index, The WSJ Dollar Index (BUXX), is an attempt to improve on existing indexes. In reality, there are two major changes—the addition of the Australian dollar, and a new rebalancing methodology to reflect trading volume.
Like I mentioned in a blog a while back, the U.S. Dollar Index (USDX) was started in 1973 after the Bretton Woods agreement was signed.
Since then, the makeup of its underlying currencies has only been changed once—to reflect the creation of the now-plagued euro. Other than that, the USDX's currency weights have been allowed to run free. The result is an index with the current composition:
The biggest issue with the USDX is its huge weighting in the euro—it simply doesn't reflect the accurate value of the dollar on a global scale.
Unfortunately, the new index, BUXX, doesn't do that great of a job either.
Unlike the USDX, BUXX claims to be a dynamic index by weighting its holdings according to trading volume data released by the Bank of International Settlements (BIS).
It has one huge problem. The BIS releases volume data in a triennial survey. Yeah, that's right—the index is rebalanced once every three years. So much for being "dynamic."
As of right now, BUXX's underlying weightings are based on the BIS survey from 2010. Giving us the following composition in the index:
BUXX lays off the euro a bit, while it bulks up on the yen, pound and the franc. Although the Aussie dollar is a newcomer to the index, its impact is minimal.
Unfortunately, the index providers missed the mark on this one.
The issue with the U.S. Dollar Index isn't the frequency of rebalancing, nor is it the addition of one more currency. It's the entire weighting and selection scheme.
You could rebalance BUXX four times a year for all I care. At the end of the day, if you base the value of the dollar on liquidity metrics, you aren't giving a clear sense of it's worth.
As always, my personal "go-to" index is still the Trade Weighted U.S. Dollar Broad Index. Though it includes currencies that may not float as freely as the euro, it does a much better job representing the value of the dollar with respect to how the global economy actually works.
Major trading partners like Mexico and China are taken into consideration, as they should be. Also, the Federal Reserve releases trade-weight data annually—none of that triennial business.
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Don't get me wrong:Funds like the PowerShares DB US Dollar Bullish Fund (UUP) that are based on the USDX are great for traders, but anyone looking for long-term exposure would be better served by something broader.
Kudos to the folks at the Wall Street Journal and Dow Jones for taking a shot, but BUXX isn't offering investors much more than USDX.