For a while now there have been conspiracy theories floating around about a “dollar debasement.” The idea is that the U.S. dollar is somehow being intentionally destroyed and losing its purchasing power.
What those arguments usually ignore is a simple concept. The denominator matters.
When someone says the dollar is losing value, the first question should be obvious. Losing value against what?
Because it’s not just the U.S. dollar that has been making new all-time lows relative to real money, gold. Nearly every major currency in the world has been doing the exact same thing.
The difference is that most of them broke down years ago. The dollar, along with the Swiss franc, were simply among the last to follow.
So this is not necessarily a story about the dollar collapsing on its own. It’s a story about gold being in a massive bull market and fiat currencies everywhere losing ground against it.
And there’s another important piece to this story.
The U.S. dollar has long been the world’s ultimate safety trade. When investors panic and rush out of stocks, where does that money go?
Straight into the dollar.
But over the past couple of years there’s been little demand for safety. We’ve been living through one of the most powerful bull markets in history.
In an environment like that, investors aren’t looking for defense. They’re looking for offense.
Lately, though, something has started to change.
Sentiment toward the dollar reached an extreme last month, right as the currency began to catch a bid. Now it’s pressing up against one of the most important levels on the chart.
And if the dollar breaks out from here, the implications for stocks and other risk assets could be much bigger than most investors realize.
US Dollars: The Ultimate Safety Trade
Last month, pessimism toward the U.S. dollar reached a fever pitch.
Investors everywhere seemed convinced the dollar was finished. The narrative had become so popular that even the journalists started piling on.
You know it’s late in a trend when the magazine covers start showing up.
And sure enough, right as that pessimism reached its peak, the dollar began to catch a bid.
Now it’s approaching a key level that served as support throughout 2023 and 2024:
That’s an important test.
If the dollar breaks out above this level, it likely means something else is happening beneath the surface. A breakout here would probably reflect a renewed flight to safety.
Personally, I never believed the dollar was falling because of some strange conspiracy theory you hear about on television all day.
Those networks are not designed to inform you anyway. Their job is to keep you watching so they can sell advertisements.
The simpler explanation is usually the correct one.
The dollar weakened because there was little demand for safety. We’ve just lived through one of the greatest bull markets of all time.
When stocks are ripping higher and risk assets are leading, investors don’t feel the need to hide in cash.
There was simply no reason to play defense.
But that may be starting to change, and the level the dollar is testing right now could tell us a lot about what comes next.
Keeping It 100
Big, round numbers have a funny way of playing tricks on investors’ minds.
I’m fully aware of this tendency and try to take advantage of it whenever the opportunity shows up. This is one of those times.
The U.S. Dollar Index (DXY) is sitting right at 100.
That level is not random. It’s exactly where the DXY bottomed in 2023 and again in 2024. Both times the dollar stabilized there and bounced.
And each time the dollar rolled back over after those bounces, stocks went on to rally.
So the question now is simple.
What happens if the dollar holds this level again and starts pushing higher?
If the dollar is carrying a 1-handle and begins moving toward 110, that probably means something else is going on beneath the surface.
A stronger dollar would likely reflect a growing demand for safety. And when investors start demanding safety, it’s usually because something else in the market needs attention.
To be clear, that hasn’t happened yet. Right now bearish sentiment toward equities is elevated enough that we want to be looking for buying opportunities, not running for the exits.
But volatility is picking up, and this week could easily bring both sharp rallies and sharp selloffs.
How the dollar behaves around this level, and how we’re talking about it a week from now, could play a major role in how stocks behave heading into the spring.
This daily note we call Everybody’s Wrong is about identifying where the market might be offside and sharing what I’m paying attention to.
And right now, this might be the most important development in the world that no one is really talking about.
They’re wrong.
Watch the dollar here.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs