Turning Point for the US Dollar: Fiscal Strain, Trade Tensions, and Global Implications

The U.S. dollar appears increasingly vulnerable to a broader decline as markets begin to price in the potential return of Trump-era fiscal and trade policies. Proposals for renewed tax cuts and higher government spending are stoking concerns about rising budget deficits and long-term debt sustainability—issues that have already prompted credit rating agencies like Moody’s to sound the alarm. A weakening fiscal position, particularly in the absence of strong economic growth or tight monetary policy, tends to erode confidence in the dollar over time. In parallel, the threat of renewed trade tensions, including potential tariffs on Canadian imports, could inject further volatility into currency pairs like USD/CAD, where commodity dynamics and central bank divergence are already in play. As the Federal Reserve edges closer to rate cuts and global economies begin to show signs of relative strength, the dollar’s decade-long advantage may be at risk. This evolving macro landscape might suggests a potential turning point for the greenback, with implications for everything from cross-border trade to portfolio allocations.

In reviewing many charts, there are two we want to bring to your attention today. The first is the U.S. Dollar Continuous Contract (DX2.F), a futures-based instrument that tracks the performance of the U.S. Dollar Index across rolling contracts, providing a continuous view of dollar strength over time. It reflects the dollar's value against a basket of six major currencies, with the euro carrying the most weight. Because it rolls through futures expirations, DX2.F is ideal for analyzing long-term trends and technical levels without gaps. Advisors use it to gauge overall dollar sentiment, hedge currency exposure, and respond to macroeconomic shifts such as interest rate changes or fiscal policy announcements.In the attached point and figure chart, scaled at 1%, we find very few positive SIA technical attributes, as a key positive trend level has recently been broken. DX2.F has moved to $98.64, completing another double bottom P&F formation. While there is a cluster of support from 2014 to 2022, the lowest level of support on this point and figure chart appears at $93.85—a level that dates back to 1997. Another support zone is highlighted in light green between $89.30 and $90.19. This comes against a backdrop of an SIA SMAX score of only 2, indicating weak relative strength versus a basket of alternative asset classes. Resistance, on the other hand, is initially seen at the 3-box reversal level of $102.64, with further resistance at $104.71—both levels that date back to 1998 and 2003, and more recently from 2022 to 2024.

Turning to our next chart, the BMO Japan Index ETF (ZJPN.TO) highlights another vector of intermarket relationships that may become a timely macro topic with growing relevance, as a weaker U.S. dollar puts a bid under the Japanese yen. This smoldering ember may have begun in August during the one-week market crash/correction and, while largely forgotten, could have been a shot across the bow. Perhaps any sustained decline in the U.S. dollar could trigger a further unwinding of the Japanese carry trade, where investors borrow in low-yielding yen to invest in higher-yielding U.S. assets, which could become unsustainable. As the dollar weakens against the yen, currency losses may erode the profitability of these trades, prompting investors to repatriate capital and unwind leveraged positions. This shift could add upward pressure on the yen and redirect flows into Japanese assets, particularly equities. With the Bank of Japan gradually normalizing policy and domestic reforms improving corporate fundamentals, a stronger yen and reduced appeal of U.S. assets may encourage increased investment in Japanese stocks from both domestic and foreign investors.Next, let’s look at a proxy for the Japanese equity market: the ZJPN.TO ETF, which has recently rallied up the SIA All CAD ETF Report. This report ranks over 850 ETFs in Canada using SIA’s relative strength point and figure analysis. Note the move back into the green, with the SIA relative strength overlay tool engaged, showing ZJPN.TO’s march up the rankings into a favored position. This is also against a backdrop of a strong SMAX score of 9 out of 10, illustrating its strength against alternative asset classes. Having broken through another double top—this time a spread double top—shares of ZJPN.TO might find resistance at the vertical counts of $38.97 and $40.55. Support, on the other hand, might initially materialize at the $36.71 level (3-box reversal), as well as notable support at $35.28, a level tested multiple times during the 2024 trading year. The positive trend level is also notable at $32.58.