Major Breakdown in the U.S. Dollar Signals Trouble Ahead

There are numerous signs that the U.S. dollar is on the cusp of a new bear market—a development that is very bullish for commodities, especially gold and silver.

Last week, I published a piece titled “The U.S. Dollar Stands at a Major Crossroads,” where I explained that the U.S. Dollar Index—a key gauge of the dollar’s value against a basket of major world currencies—was sitting right on a critical long-term support level at 100. 

This level had held firm for years and sparked multiple sharp rebounds in the past. I warned, however, that a decisive break below it would confirm a deeper dollar bear market—an event that would be highly bullish for commodities like gold and silver.

Well, that breakdown finally happened today—driven by a combination of factors. Chief among them is growing market anxiety that President Donald Trump may still be exploring ways to remove Federal Reserve Chairman Jerome Powell, a move that would spark a serious crisis of confidence. 

At the same time, fresh signs of economic weakness emerged as the U.S. Leading Economic Index posted a sharp decline in March. Together, these developments have heightened expectations of Fed rate cuts—an outlook that’s inherently bearish for the dollar.

As the daily chart below shows, the U.S. Dollar Index has clearly sliced through the critical 100 support level that many market analysts have been closely watching. This decisive breakdown issues a strong bearish signal, indicating that further declines are likely ahead.

The longer-term weekly chart of the U.S. Dollar Index highlights just how important the 100 level has been in recent years. Several major rebounds have occurred off this level in the past—typically to the detriment of commodities—but not this time. The index has finally broken down. 

The next key support level I’m watching is 90, which would represent a 10% decline from here. That’s a very realistic target, especially as we move closer to a recession and bear market.

The even longer-term monthly chart of the U.S. Dollar Index reveals that it has been trading within a rising channel since around 2008. 

A decisive breakdown from this channel, in my view, would mark a major turning point—signaling the start of a new dollar bear market reminiscent of the one that unfolded in the early 2000s.

Another strong sign that something big is unfolding in the currency market is the euro’s breakout above a 16-year-old downtrend line against the U.S. dollar. 

This is highly significant—it indicates that the euro may be on the verge of entering a new bull market after spending nearly two decades in decline since around 2008. 

Because the euro and dollar trade inversely, a rising euro reinforces the bearish case for the dollar.

This development is especially noteworthy given the euro’s historical correlation with commodities. During the early 2000s, for example, the euro’s bull run coincided with a powerful commodities boom and a prolonged dollar bear market. History may be starting to rhyme again.

The Japanese yen is also facing a key downtrend line against the U.S. dollar, and a breakout above it would be a strongly bullish signal for the yen—and another bearish development for the dollar: 

Historically, U.S. dollar bear markets—like the one in the early to mid-2000s—have been extremely bullish for commodities. 

The chart below, a logarithmic view of the ratio between the GSCI Commodity Index and the S&P 500, highlights just how undervalued commodities remain relative to stocks. This extreme imbalance is likely to reverse once the dollar bear market fully takes hold.

A clear signal that the commodities bull market has begun will come when this ratio breaks above its long-term downtrend line—indicating that commodities are once again outperforming equities.

There’s been a lot of talk lately about so-called “U.S. exceptionalism” in financial markets—referring to how the U.S. stock market has surged over the past decade while most of the world’s markets have languished. 

This outperformance has attracted massive inflows of international capital. But that dynamic is likely on the verge of reversing. 

With a dollar bear market getting underway and the U.S. stock bubble beginning to burst, the era of U.S. market dominance is coming to an end.

The logarithmic chart below shows the ratio of the VEU—Vanguard FTSE All-World ex-U.S. ETF, which serves as a proxy for non-U.S. stocks—to the U.S.-based S&P 500. Since the early 2010s, during the height of the European debt crisis, non-U.S. stocks have consistently underperformed. 

However, that trend is changing: the ratio is now in the process of breaking above its long-term downtrend line. 

This nascent breakout—especially when considered alongside similar moves in the euro and other global currencies—adds further weight to the idea that non-U.S. stocks could begin outperforming their U.S. counterparts in the period ahead.

That said, it's important to clarify that this relative outperformance doesn’t necessarily mean non-U.S. stocks will rise—or are even good investments in absolute terms. 

In the kind of global crisis I expect, nearly all stocks will decline. The key point is that U.S. stocks—due to their extreme overvaluation—may simply fall faster and harder than those abroad. 

Although I’m steering clear of traditional equity investing ahead of the looming crisis, I can see merit in a strategic pairs trade: long non-U.S. stocks, short U.S. stocks. This way, the goal is to profit from relative outperformance rather than absolute gains.

Yesterday's breakdown in the U.S. dollar is fascinating, noteworthy—and deeply concerning. It has far-reaching implications across global financial markets, including currencies, commodities, equities, and beyond. 

As a fervent bull on precious metals and commodities, this dollar weakness is undeniably bullish for those assets and a welcome tailwind. 

But at the same time, it raises serious concerns about the broader U.S. economy. Historically, a major breakdown in the dollar is associated with economic downturns and stock market declines. 

I’ll be monitoring this development closely and will continue to keep you all informed as the situation unfolds.

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