As suggested some months ago – I had envisioned a time where “all things U.S” would likely be sold. We saw the trend appear first in bonds, then considerable US Dollar weakness and finally the inevitable spill over into U.S equities.
Trouble is that now….we need to consider that indeed rates in the U.S will be on the rise (not “tomorrow but in general), and in turn hurt corporate borrowing ( and the ability for companies to increase profits ) which in turn will create even “further” weakness in the U.S economy in general….as earnings will likely suffer as a result.
The bond market is much, much larger than Ben Bernanke – and all the printing in the world can’t change that. When fear sets in and sellers “sell” – the 20% that Ben doesn’t control can bury him in a second.
I don’t see the “flight to safety” being U.S Dollars this time around folks.
I’m leaning LONG JPY here as of this morning, as well looking to limp into SHORT USD trades over the next couple of days.
The Mechanics Behind the Dollar’s Inevitable Decline
Interest Rate Differentials Are Shifting Against USD
While the Fed continues to paint a rosy picture of controlled tightening, the reality is that real interest rates in the U.S. remain deeply negative when you factor in actual inflation. This creates a fundamental problem for USD strength going forward. Compare this to the Bank of Japan’s position – yes, they’re still maintaining ultra-loose policy, but the carry trade dynamics are shifting. The JPY has been so oversold for so long that even minor changes in risk sentiment create explosive moves higher. We’re seeing this play out in USD/JPY right now, where every bounce gets sold aggressively. The smart money isn’t chasing yield anymore – they’re positioning for currency stability, and that’s not the dollar.
Look at the EUR/USD technical picture as well. The European Central Bank’s hawkish pivot is real, and energy independence from Russia is actually strengthening Europe’s long-term economic foundation. Meanwhile, the U.S. is dealing with persistent inflation that’s proving far stickier than anyone at the Fed wants to admit. When you’re buying EUR/USD dips and selling USD/JPY rallies, you’re positioning with the macro trend, not against it.
Corporate Earnings Headwinds Will Accelerate Dollar Weakness
Here’s what most traders are missing: rising rates don’t just hurt borrowing costs �� they destroy the entire foundation of U.S. corporate profit margins. Companies have been addicted to cheap money for over a decade, using it for stock buybacks, acquisitions, and operational financing. When that spigot gets turned off, earnings multiples compress violently. This isn’t some theoretical future scenario – we’re already seeing it in the forward guidance from major corporations.
The ripple effect hits the dollar hard because foreign investment in U.S. equities has been a major source of dollar demand. When international money managers start rotating out of overvalued U.S. stocks and into European value plays or Japanese defensive positions, that’s direct selling pressure on USD. The correlation between S&P 500 performance and dollar strength isn’t coincidental – it’s structural. As earnings season continues to disappoint, expect this dollar weakness to accelerate.
Safe Haven Flows Are Redirecting Away From USD
The most critical shift happening right now is in safe haven demand. For decades, any hint of global uncertainty meant automatic dollar buying. That playbook is broken. Why? Because the U.S. itself has become a source of uncertainty rather than stability. Political dysfunction, persistent inflation, and an increasingly aggressive Fed create their own risk premium. Smart money is diversifying away from dollar-denominated assets as a hedge, not toward them.
JPY is reclaiming its traditional safe haven status, but with a twist – it’s not just about risk-off flows anymore. The Bank of Japan’s yield curve control is creating artificial stability that’s actually attractive in a world of central bank chaos. When you combine that with Japan’s massive current account surplus and their shift toward domestic consumption, you get a currency that’s fundamentally undervalued. Going long JPY isn’t just a tactical trade – it’s a strategic positioning for the next phase of global monetary policy.
Tactical Execution: How to Trade the Dollar Breakdown
Timing these moves requires patience and proper position sizing. Don’t try to catch falling knives with oversized positions. Instead, build your short USD exposure gradually across multiple pairs. USD/CAD offers excellent risk-reward given Canada’s commodity advantage and relatively stable central bank policy. GBP/USD might seem risky given the UK’s challenges, but sterling is so beaten down that any stabilization in British politics creates explosive upside potential.
For JPY longs, focus on crosses, not just USD/JPY. EUR/JPY and GBP/JPY have further to fall as European and British rate hike cycles lose momentum while Japan maintains stability. These crosses often move more dramatically than the dollar pairs and offer cleaner technical setups. The key is recognizing that we’re not just in a dollar bear market – we’re in a complete reshuffling of global currency hierarchies. Position accordingly, and the profits will follow the macro reality.
Hey Kong how do you see the Canadian dollar being affected vs the usd over the next bit
The damn pair is frustrating as hell to trade…as it tends to just range and range, then BAM! Then range and range….
Looking at these levels, I’m going fishing short the pair pronto…and will just add on confirmation that USD does indeed roll over here, and make considerable moves lower.
This is as contrarian as it gets (at least for me). Last time i felt differently then you my account did a Thelma and Louise. I’m listening Kong. I’m listening.
Ok……I’m leaning long JPY here man – as the larger “currency” to take safe haven flows, and am debating that with nowhere else for “older gents” – Gold and the Pm’s might take a share as well.
As well juuuuust waiting a day er two longer to see what correlation asserts itself with USD and U.S equities.
I still expect USD to move considerably lower, and lower….and had more or less assumed that equities would follow. Then a big couple up days for USD ( bounce only ) but equities continued lower “reversing that correlation”. SO…….I’ll get my answer “equity wise” here in 48 hours as I firmly believe that USD is heading past prior lows.
Sitting on my hands. Watching closely.
Smart man……smart man.
I can tell you – it’s pushing me around as well. Wow….nuts out there.
Im envisioning a trade where USD falls…..SP 500 rises…..JPY ALSO RISES……and get this……AUD rise as well!
I can honestly say – as wacky as I’ve ever seen it….and it makes sense in a “sick kind of way” as this turn……is likely the most significant for several months ( if not even years ) to come.
Sashimi is always a good flight to safety dinner for me.
You’re not going to believe this but ( for real )I’ve got a beautiful slab of tuna in the fridge, and am doin sashimi at home for lunch!
And yes “chart wise” I’m seeing the ol Yen looking “tastier by the minute” – volatile as hell….but looking to push higher as USD rolls on over.
Equities are up in the air til I see USD make a solid direction move.
hmmm interesting – so you think equities will rally here…. hmmm
I’m going with the term “bounce” as opposed to rally…..and I’m still eyeing it.
It’s the correlation with USD and U.S equities I’m still waiting on. This last rise in USD had stocks dump…so it’s either “both down together” or “let’s mix it up for week” – and flip that on it’s head.
We’ll see in a matter of hours I imagine.
Thanks Kong -I hear you…. on the side-line relative to currencies….. my monthly squeeze is still set -up as a NEG fire for the monthly candle….. I would need to see a bounce or more above .9600 to have this neg fire reverse….. otherwise it’s not looking good for the Aussie….. I did think a bottom was in but we all know now that’s a big NO…. LOL sitting & waiting…. & waiting…
I have a neg fire in the AUD/USD pair – limping in enter on the 5ive….:) for now will monitor close….
Correction…. LOL too many things on the go…… make that USD/CAD pair short… AUD/USD 1hr still setting up for a fire….. looking like it will be positive…… enter placed .9302 🙂 sorry for the confusion…
Kong what you think about audjpy i had set some limit orders small 1s and have some little lower if whe drop through lows again.
On weekly looks decent strong level?
Fuzz
I’m not touching anything “AUD” until I get some kind of clarification on it’s direction.
It’s obvious that “something is up” with it’s sideways action at a pretty solid area of support but….that could go either way.
The fundamentals suck – so there is no reason for it in that respect – I’m just ignoring it until I see it make up it’s mind.
Ok thanks kong apreciate your comment will not touch will do the same here 🙂
I just took the smallest position possible long AUD/USD with a 150 pip stop Fuzz. For fun!
I thought I should let you know.
Thanks kong 🙂