In the early 1990s, the US Dollar Fundamental Forecast, which is also known as the “FOMC Survey”, showed that the US Dollar Index was likely to depreciate from its previous highs and remain weak over the next several years. The main reason given for this trend was that the Federal Reserve, the central bank of the United States, had made a large and unexpected rise in its monetary supply in order to combat the global recession. This increase in the supply of money caused both investors and consumers to raise their expectations, leading to a large and unprecedented price rise, which then turned into a correction when the economy started showing signs of weakness.
However, as the US economy began to show signs of strengthening, the Federal Reserve realised that it was unlikely to have much impact on the economic recovery, due to the fact that the Federal funds rate (a rate at which banks can borrow funds from the central bank) was very low and would not rise until unemployment fell below 8%. In addition, since the economy was showing signs of improvement, the Federal Reserve was also unwilling to cut interest rates. As a result, by the end of the year, inflation was beginning to rise again, which meant that the Federal Reserve had little scope to cut interest rates. As a result, this meant that the FOMC Survey predicted the price index would fall slightly in the next few months.
The price of the US Dollar continued to fall over the following year, but after the third quarter of 1992, it began to rebound as financial markets began to improve. This meant that, in the FOMC Survey for the fourth quarter of 1992, this time with the global economy remains weak, the FOMC Survey predicted the US Dollar Index to return to its previous highs.
However, just as the economy started showing signs of improvement, the Federal Reserve started to increase its monetary supply in an attempt to prevent the economic recovery from deteriorating further. The supply of money increased by about 40% and the Federal Reserve’s ability to influence the market was severely limited. This meant that the US Dollar Fundamental Forecast did not accurately forecast the strength of the recovery.
Over the next few years, the FOMC Survey predicted that the US Dollar Index would return to its previous highs, even though the price of the currency continued to rise. However, after the United States elected a new president and a new Congress, the Federal Reserve began to tighten its monetary policy again. causing the US Dollar Fundamental Forecast to turn negative and become quite pessimistic.
In late 2020, the US dollar index began to fall once again and it has continued to do so since then. Despite the rise in inflation, the decline in the demand for money has meant that the US Dollar Fundamental Forecast has not accurately predicted any major upward movement in the value of the US Dollar.
As a result, the United States Federal Reserve has continued to buy Treasury Bonds to prop up the Dollar, in an effort to maintain stability in the domestic economy and keep the recovery from being reversed. However, the inflation has continued to rise and this means that the price of the USD continues to increase. Furthermore, the FOMC Survey predicted that the price of the Dollar Index will continue to increase steadily through 2020, with a further increase in inflation in future years.
The only reason that this chart has been able to predict that the price of the US Dollar Index will stay on a downward trend for the foreseeable future, as long as inflation is allowed to run its course, is because the FOMC Survey failed to forecast the global financial crisis of 2020, which took place in September 2020 and caused a large global financial crisis. Although the US government responded rapidly to avert disaster, the global financial crisis has left the country with many problems and the United States Dollar Fundamental Forecast has failed to predict any significant growth in the value of the currency, or any significant fall in the price of the currency.