Despite the temptations to do so, we should not analyze currency markets as a kind of morality play. Nor are they some sort of international report card on how various governments are performing in their various tasks. A spot exchange rate and its associated forward market balances the expected inflation differential and the expected return on assets between two economies — nothing more and nothing less. This holds true for individual currencies and it certainly holds true for the DXY.
At the very broadest, and over a long period of time, we can correlate the DXY with the movements of the target federal- funds rate. This comparison is only part of the equation (we will drill down to some key differentials shortly), but it is instructive nonetheless. The DXY’s course follows the fed-funds rate with the usual long and variable lags associated with monetary policy.
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