We have received questions about the US Dollar index and while we are not specialists in the Forex market, the tools we used to assess equity markets, to a certain degree, could be leveraged on this topic.
There's a high probability that unlimited amounts of money printing will lead to weaker currencies and we are seeing assets moved away from the US Dollar to other alternatives such as equities, real estate, precious metal, and even crypto currencies.
The US Dollar peaked in March 2020 at 103 but has fallen -13% since then. Double digit fluctuations in currencies is substantial and should be examined.
To see how far this downward trend can go, we have utilized the Year-Over-Year model (YoY) and reviewed the past for reference.
The chart below shows the year-over-year percentage change of the US Dollar Index, in this case we use DX-Y from Yahoo Finance. We can see that average change is virtually flat at 0%.
Applying +/-1 standard deviation range to establish a trading range of +/- 10%. Currently the index is at -9% for the year and approaching a bottom of the boundary. Given that the Federal Reserve has no intention to stop printing money in the near term, we forecast that this index could reach -15% before any reversal to the declining trend.
As a reference point, we can look back at the financial crisis time frame when the index registered a triple bottom between 2008-2011.
It can be argued that we are in a similar environment where the Fed must print their way out. A near-term bottom could be in place but a risk of double or triple bottom is possible based on the precedence.
We're not as worried about the decline to a new low as much as we are concerned about a sudden rise to the upside.
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