The reason for the local/DX switch is because sometimes when you're close to a broadcast station of some sort, you'll actually hear things BETTER if you put some attenuation on the antenna. You have not done yourself any favors by making that modification.
This is particularly the case in Europe and the Middle East. In North America it isn't as much of a problem because radio stations are usually limited to 50 kW maximum. However, in many countries, shortwave broadcasters are licensed for Megawatts of power (I'm not kidding!). When the first couple of stages in a receiver overload, it makes for problems across the entire band, and it limits the ability of your receiver to dig signals from the noise.
As for the FM, AIR and PS bands, most wideband radios have attenuators. As you go closer to urban areas, you'll find more and more interference may creep in to your listening. And strangely, though the signals will be weaker, you'll actually hear them more clearly if you set it to "local" instead of "DX".
Hope this helps...
