The Dollar Is Primed for a Big Move

By Larry Benedict, editor, Trading With Larry Benedict

Trade wars, uncertainty over the economic outlook, inflation concerns, high interest rates… Despite these crosscurrents, the stock market is marching to new highs.

But the largest market in the world – currencies – isn’t following along.

While the S&P 500 has risen to fresh records, the U.S. dollar recently plunged to its lowest level since early 2022. Currency traders are reacting in real time to unfolding events around tariffs and trade wars.

Last week, President Trump released letters to the public announcing new tariffs. That includes a 50% tariff on copper imports and 35% against Canada.

And the world’s reserve currency hasn’t been spared from the whipsaws.

But now the dollar is getting stretched too far in one direction. And it looks primed to reverse.

Today, let’s break down the chart and look for trading opportunities at hand…

Breaking Down

You can track the price action in the dollar with the U.S. Dollar Index (DXY). It measures the performance of the dollar against a basket of currencies like the euro, British pound, and Japanese yen.

DXY soared following the U.S. election back in November. That move looked like it would push DXY out of a range it has held for nearly three years.

But then DXY reversed hard and broke that range to the downside. Here’s the DXY chart:

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Since late 2022, DXY has traded in a range shown with the shaded area in the chart. Then the dollar soared in the aftermath of the election and broke higher from the range (“1”).

But DXY peaked just a week before Trump assumed office and made a sharp move lower. That pullback took out support at the 100 level (“2”) and has plunged further from there.

In fact, DXY finished the first half of 2025 down over 10% on the year. That’s the worst start for DXY since 1973.

But signs point to the dollar getting extended to the downside. Vitally, a mean-reverting move higher is developing…

Conditions for a Reversal

Just as DXY traded at its lowest level in over three years, several signs of oversold conditions emerged.

First, the dollar is getting stretched extremely far below its 200-day moving average (MA).

The chart below tracks where DXY is trading relative to its 200-day MA. You can see the recent lows took DXY more than 6% below the 200-day, which historically has meant it is stretched to the downside.

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Just as momentum looks oversold, there’s a positive divergence developing with the Relative Strength Index (RSI).

The RSI measures underlying price momentum and can also point to overbought or oversold conditions.

But you should also pay attention when the RSI starts to diverge from the underlying price trend. Take another look at the DXY chart.

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As DXY was making a new low from “1” to “2,” the RSI is making a higher low (dashed line).

That’s another sign that positive energy is building for a rebound in DXY.

Just as the trade war headlines heat up again, DXY looks primed for a turnaround.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict