Dollar index as a relative inflation money indicator - Standard model but still useful as a starting point

 

Forecasting is not easy, but an effective method is to start with a simple construct or explanation and then add complexity or counter-examples for why the simple may not work. Of course, a good forecast is not the same as a narrative. The narrative will use data to provide an explanation to the past or current environment. Even a detailed narrative is not the same as making a prediction about the future. 

A quick look at the dollar (DXY) index and some current macro information sets the stage for what is important for a continued dollar trend or a reversal. One, inflation spiking in US relative to other major G7 countries is placing significant downward pressure on the dollar. Two, the relative money growth in the US over the last year relative to the other top central banks (C5) also places more downward pressure. The dollar  slide will stay in place given a continued guidance that Fed policy to keep rates lower for longer and allow inflation to run hot. Even with transitory inflation, using macro numbers in the US with a monetary model does not look dollar attractive. The trend will only change if there is a switch to hawkish sentiment from the Fed coupled with some taper action.

The forward dollar prediction is a judgement on relative inflation, relative money, and relate rates differences. While for many this may be viewed as obvious, it is always good to go back to basics for framing predictions.