Have you noticed the striking parallel between what's happening with the USD Index right now and what we saw in early 2018?
The similarity is uncanny, and it offers significant insight into where markets might be headed.
In January 2018, then-Treasury Secretary Steven Mnuchin made comments at the World Economic Forum in Davos that sent shockwaves through currency markets. When he stated that "Obviously a weaker dollar is good for us as it relates to trade and opportunities," the dollar plummeted in its biggest one-day drop in 10 months. The USD Index tumbled to a three-year low, with traders treating it as "a one-way bet" against the dollar.
Fast forward to today, and we're witnessing a remarkably similar scenario playing out with the recent tariff announcements. Just as in 2018, negative news for the dollar has knocked it down sharply, with the USD Index dropping to multi-month lows following Trump's tariff proclamations and China's retaliatory move to raise duties on US goods to 125%.
Back in 2018, I stood against the prevailing bearish sentiment on the dollar. While everyone was piling onto the "weak dollar" narrative, I was analyzing the fundamental and technical factors that pointed to a rebound. And sure enough, despite the initial panic, the dollar eventually stabilized and began a substantial rally that caught many investors off guard.
Today, we're seeing a similar pattern of market overreaction. The USD Index's recent decline has been driven more by sentiment than fundamentals, creating a situation where, just like in 2018, the market appears to have priced in the worst-case scenario.
What happened after the 2018 Mnuchin incident is particularly instructive.
Despite the doomsday predictions, the dollar found a bottom and began a substantial rally. This occurred because markets eventually reassessed the situation and focused on strong fundamentals - exactly what I expect to see happen again.
And just as the USD Index formed a major bottom, the precious metals sector (and stocks) formed a major top. Most interestingly, the GDXJ broke out a bit above its previous high before sliding. Sounds familiar?
Similar to 2018, today's USD Index appears oversold, and sentiment is overwhelmingly bearish – often a powerful contrarian indicator. The sharp decline following the tariff announcements mirrors the reaction to Mnuchin's comments, but in both cases, the fundamentals suggest the slide is likely temporary.
For precious metals investors, this has significant implications. If the dollar does indeed rebound as it did following the 2018 incident, we could see substantial downward pressure on gold and silver prices and even greater on junior mining stocks that would be likely to slide along with the stock market. This is especially important considering how gold has been trading near record highs, fueled in part by the weakening dollar.
In conclusion, while the current weakness in the USD Index might appear concerning at first glance, history suggests it might be more of a temporary correction than a permanent shift. The 2018 Mnuchin episode provides a valuable template for what could unfold in the weeks ahead – initial panic followed by a reassessment of fundamentals and an eventual reversal.
Besides, the technical situation for the USD Index strongly favors the scenario in which we’re seeing a bottom right now – a major one.
From the long-term point of view, we saw two attempts to break below the 2023 lows and two invalidations. Those are medium-term buy signals.
From the short-term point of view, we see that the USD Index has been making higher intraday lows – a good sight showing that bears strength is waning.
Zooming even more reveals that the USD Index just broke above its triangle pattern, and it moved above it.
Now, while this might mean that the bottom is in, it could also result in another immediate-term decline that would take the USDX back to the just-broken declining line (upper border of the triangle).
The latter might be important as it could provide the final push to stocks, commodities and – perhaps, but not necessarily – PMs.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief