🗞 Is the Dollar Dead?

WHILE YOU POUR THE JOE… ☕️

The periodic table now looks like an entire meme stock basket.

From gold to silver, swings have now become as wild and wide as they come, with hundreds of opinions floating around.

The Chinese speculative buying and selling, dollar repositioning, risk-off narratives, etc.

We are here today to talk about one of these factors, and it is the dollar and its future potential path.

In my last newsletter, I showed you a few pointers covering the dollar drivers. We’ll pick up where we left off and arrive at a historical/present view of the currency and where it might be headed next.

Speaking of the dollar, let’s get on with today’s email 📧…

READING MACRO
Start Your Engines

After a few hours of digging through some dollar drivers, I can tell you it’s driven by two main factors:

• Rate sensitivity

• Volatility regimes

This makes economic sense, as rates essentially drive a currency’s attractiveness from a carry perspective.

Then, on volatility, the dollar being a safe haven, higher volatility regimes drive capital into the DXY index.

Drilling into the 2020-Present window, you can see how much TLT/SHY (a yield curve proxy) has deviated into positive territory.

This essentially means an outperformance premium has been harvested through the “easy money” and loose rate policy years of the recent past.

It also means the TLT/SHY spread could pop and rally in the coming months, which is consistent with a broader defensive rotation.

Now,

This covers the rate side of the equation. We can move on to the volatility regime take and figure this thing out:

Ever since Liberation Day (April 2025), the volatility index has compressed to pretty boring levels.

This is, of course, bearish for the dollar as there is no reason to seek out its protective characteristics.

However, last week’s price action in what seemed “safe” is showing you that this narrative may soon change.

S&P 500, Bitcoin, Silver, Gold. A sudden volatility whipsaw, which makes the bull case for the dollar a bit more attractive to traders and risk managers.

Now let’s get into the last piece of the puzzle, a take that’s more economics-focused in this case.

Trade balances can also help you decide where the next leg of a country’s currency may be headed.

For the United States, through PMI data, you can spot the month-to-month trends in these balances without having to wait for the quarterly data to be released.

Pinpoint the periods where these balances swung the hardest:

• January 2022

• September 2022

• June 2024

• January 2025

Subsequently, this is also when the TLT/SHY and the VIX also had significant swings affecting the dollar price action in the same fundamental manner, which I’ve explained.

It all lines up economically and statistically in this dollar breakdown.

With these tools at your disposal, you can now put it all together through three pretty reliable factors:

• TLT/SHY (rates) regime shifts

• Trade balances

• VIX seasonality

Let’s paint the entire picture then:

I’ve annotated it all for you during each of the periods of interest, which leads us to the present-day selloff in DXY.

For it to recover, we’d need to see the following:

• A TLT/SHY spread rally with an accompanying 10Y-2Y yield curve swing

• Positive trade balances

• Rising VIX regimes

So far, we seem to be getting one of three in TLT/SHY, and the premium harvesting model shows the spread is pregnant with upside when the next five years are considered.

Trade balances will be updated this week once we receive both the manufacturing and services PMI data.

Then all we would need is a higher VIX, and voila, the DXY index can break out and recover through 2026. 📈 

The deviations in the IVE/IVW spreads are one last signal I’m looking for, especially as the current regime suggests a big premium buildup in the spread for the next five-year period.

An environment where IVE (value) outperforms IVW (growth) also means a defensive rotation in the market overall.

Guess what?

Defensive = Dollar bullish.

When I posted this research in my private community, the index traded at $96.50.

We closed on Friday at $97.14.

So I guess the model is working (?).

To your success,

G 🫰