With inflation in the United States reaching very high and alarming levels, investors are looking at different investment tools to understand what could happen in the coming months and years. As we leave behind COVID-19 times, it might be a good thing to start having a look at possible DXY Index forecasts for this and next years.
The DXY Index is among the most important indicators to understand United States’ economic relations with its trade partners. This brings us to the question: where is the DXY Index headed this year? Could we see a rapid spike in the U.S. dollar or investors should expect it to start moving lower? We cover these and more things in the following sections.
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The DXY Index is a popular index that measures the relative value of the U.S. dollar (USD) compared to a basket of other currencies. This is a very useful tool that let us know whether the U.S. dollar is overvalued or undervalued if we compare it to other currencies.
At the moment, the DXY Index tracks six different currencies from different countries. Each of these currencies has a different weight on the index, depending on the commercial relationship that there was between some countries and the United States.
The currencies include the following:
This shows how important some countries were for the United States in the past. Understanding the relative value of the U.S. dollar against these currencies was very important to having a clear picture of possible commercial relationships and trade imbalances.
Nowadays, however, there are other countries that are very important trading partners for the United States that were not included in the Index. These countries are Brazil and Mexico and their currencies the Brazilian real (BRL) and the Mexican peso (MXN).
Before having a DXY Index forecast, we need to understand what the DXY Index could do and what it means for the US dollar. The DXY Index would let us understand whether there are possible commercial imbalances and which are the trends that the index could follow.
A larger demand for the U.S. dollar would result int he DXY Index moving higher. The opposite would happen if the U.S. dollar is exchanged for local currencies that raise in value. Let’s not forget that there is a basket of currencies fluctuating against the U.S. Dollar with the euro representin half of the total value of these currencies.
That means that what happens in Europe with the euro is going to be very important to analyse the DXY Index in the future. Additionally, central banks would be those institutions responsible about the path that the currencies used to measure the DXY Index would follow. This would be very important to have a clear DXY Index Forecast.
The following chart shows that the DXY Index trended lower over the last months as the COVID-19 crisis heavily affected the world’s economy. As we can see, this could be heavily related to the way in which the United States decided to handle the pandemic by printing large amounts of money.
As we mentioned before, the euro plays a very important role in the DXY Index. That means that we should closely follow its trend in order to understand what could happen to this indicator.
Since the beginning of 2021, we have seen that the DXY Index has been moving higher. This could be strictly related to a weaker euro. GDP recovery in the eurozone is not as positive as it was expected to be and inflation rates are at the highest point in years. This has clearly had an influence over the euro and the trust investors have in the currency.
It would be very important to see what would happen to the U.S. dollar as soon as the Federal Reserve starts tapering after the Coronavirus crisis and a period of low-interest rates and expansionary monetary policy.
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