What that charts say is next for the U.S. dollar and how that could help stocks

The U.S. Dollar’s future path could have significant implications for U.S. equities. While many investors don’t trade the dollar or other currencies, we should all be paying attention to the foreign exchange markets. First, let’s assess the dollar’s current technical state. Here is a long-term, 20-year monthly chart of the ICE U.S. Dollar Index , which compares the greenback to a basket of other currencies. A few things stand out: First, the dollar has been attempting to break out from a multi-year trading range for just the third time in the last 20 years. The U.S. dollar’s marginal loss in January broke its modest three-month winning streak. So far, however, it remains above the two-year trading range that it broke out from in December 2024. The last two major pattern breakouts led to extreme overbought readings in the following months. While the dollar’s recent strength has been impressive, it is not yet comparable to what we saw in late 2014–2015 and 2022. It could eventually reach that level in the coming months, but for now, this breakout hasn’t exhibited the kind of intense and immediate extension seen in recent history. This suggests that the recent move above the $107 zone could be a false breakout. Many times, a false move in one direction leads to a sharp move in the opposite direction. If the breakout ultimately fails, it could set the stage for the next downturn instead. Since the start of 2022, there have been three distinct tops in the dollar: September 2022, September 2023, and April 2024—and potentially another in January 2025. This is significant because USD tops preceded key trading lows in the S & P 500 each of those prior three times. While the S & P 500 only declined 5.5% from its early December peak this time, as we discussed in our analysis of the RSP Equal Weight S & P 500 ETF two weeks ago, many non-growth sectors experienced official 10% corrections from late 2024 through early 2025. Many of these sectors began rebounding last month — just as the dollar started to stall. From that perspective, reversals in both the dollar and the broader equity market don’t seem far-fetched at all. While it’s clear that the S & P 500 and the U.S. dollar have had a negative correlation the last three years, particularly at key inflection points, the 10-year Treasury yield and the U.S. Dollar have moved in near lockstep. Even casual market observers recognize this relationship but seeing both overlaid on a chart really emphasizes the connection. Conceptually, this is all about inflation expectations. If inflation is expected to rise, investors demand higher yields on bonds to compensate for the decrease in purchasing power. At the same time, a stronger dollar can be a response to inflation expectations if the Federal Reserve raises rates to control inflation. This makes sense given the softer-than-expected inflation reports of late. It also aligns from a technical standpoint, as both the dollar and the 10-Year Yield have returned to the upper bounds of their respective three-year trading ranges. If both are indeed due to retrace their recent advances, the stock market could benefit again — just as it did during the three prior instances since 2022. — Frank Cappelleri Founder: DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.