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The U.S. Dollar Index bounced at its bull market support line.

DXY is mostly the euro (58%). It looks like a base forming, but it didn’t quite make it all the way yet. The euro is trading at or near decades (with an s) highs versus currencies such as the yen and Canadian dollar. I can’t deny the bullish setup if it continues, but one could also argue the euro’s strength is unwarranted given the macroeconomic backdrop of trade wars and aging demographics. 

I’m agnostic on JPY because a yen rally doesn’t rule out a disinflationary or deflationary bust scenario. Historically, it was evidence of one. 

Developed market indexes such as EFA also beat emerging market indexes such as EEM this year. Expectation: EEM should beat EFA in a new bull market led by foreign markets.

I’m also agnostic on bonds if they move big. Here’s EDV, a fund with a bit longer duration than TLT. The disinflation/deflation scenario is bonds take off as investors panic. A breakdown sends rates higher when everyone is looking for rate cuts. Much of the recent USD weakness is arguably a mix of expected Fed cuts and belief that the ECB is ending its rate cut cycle. Change the expected rate outcomes and the currencies will follow. 

DXY has been moving with ZB since this inflation era kicked off. The Tariff Tantrum broke the relationship briefly, but it’s back on. 

In general, a strong dollar isn’t good news for the global economy. This is especially true when it’s a sharp move. Who isn’t betting against the dollar, be it directly or via proxies such as crypto, precious metals, commodities and equities? 

DXY is a currency index. It’s possible, as 2022 showed, for the dollar to rally with commodities. The recent move in silver, platinum and palladium was inverse to the dollar. A disinflationary or deflationary scenario argues for a sharp reversal in the metals. An inflation scenario could see the metals take off even as DXY rises too. We’re in a new paradigm when it comes to the dollar’s relationship with traditional assets too. This isn’t 1970s America dependent on oil imports.

A breakdown in the dollar will ignite silver along with many commodities. Capital will exit the USA for foreign markets. Conversely, a rising dollar might not be bearish for equities immediately, but eventually, a strong dollar should herald broad market weakness. With most investors positioned for dollar weakness, a strong dollar would be the most painful of developments.

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