Dow Jones FX Trader last week introduced the Wall Street Journal Dollar Index, a new trade-weighted index of foreign exchange rates versus the dollar that, according to index co-creator Vince Cignarella, “captures all the major flows in the market.”
Cignarella, a former currency trader who now works as an FX strategist/journalist with DJ FX Trader, collaborated with Dow Jones reporter Stephen Bernard to create the index. They took the results from the 2010 BIS Triennial Survey and, by including each currency that held over one percent of the volume, developed a trade-weighted index of seven currencies: the euro, Japanese yen, British pound, Australian dollar, Canadian dollar, Swiss franc, and Swedish krona. The index will be reweighted after each triennial survey creating, in the words of Cignarella, “a living, breathing index.”
“What we have tried to do is invent the better mousetrap, if you will,” said Cignarella. “There are dollar indexes out there – some old; some new. But we felt that all of them, in some place or another, were not capturing what the market is trying to tell us.” For example, the ICE Dollar Index, which Cignarella acknowledges remains the market standard in both name recognition and trade volume, does not capture all of today’s money flows. “Unlike the ICE dollar index, ours includes the Aussie dollar, which we use as a proxy for where China is trading.”
The triennial rebalancing of the index to reflect the BIS findings means that, should an emerging currency, such as China’s renminbi, reach the one percent threshold, it will be added to the index.
Other dollar indexes, such as the new Curex G8 Index and Dow Jones-FXCM Dollar Index (featured in a JLN Forex interview after its release in June 2011), are equal-weighted, which make them very trade-friendly in terms of arbitrage, hedging and portfolio management, but may be less balanced in terms of information regarding the true value of the dollar.
The WSJ Dollar Index is meant to be, first and foremost, a news product, to be used by The Wall Street Journal, Barron’s, and other Dow Jones properties as a “fair representation” of the value of the dollar. While there are currently no plans for tradable products based on the index, according to Kathy Farley, Director of Product Management for Algo and FX at Dow Jones, “if market participants want to trade on it we’re open to discussions.”
Though the company denies that this product marks the beginning of a new index business for Dow Jones, my guess is that we will eventually see other indexes published under the WSJ name. Strategically, this would make sense, given that Dow Jones recently spun off its index business. S&P Dow Jones Indices is now a joint venture between McGraw-Hill and CME Group. Wall Street Journal is one of the most powerful brands in the industry, and one that has been under-utilized by the company. Though Dow Jones still owns a 2.6 percent interest in S&P Dow Jones Indices, a suite of indexes under the WSJ name would fill the void quite nicely. Stay tuned.
Meanwhile, take a look at the WSJ Dollar Index and decide for yourself whether it is truly “a better mousetrap.”