DXY USDX Historical Extremous Dollar of 40 Years vs. S&P 500 in "Dot-Com" Rally – Something Will Have to Give In

[Igor Pereira]

We're witnessing a historical foreign exchange anomaly. The Real Wide Dollar Index Weighted by Commerce (Fed Trade Weighted Real Broad Dollar Index) is being negotiated near its highest level in 40 years.

By Igor Pereira, Financial Market Analyst, Junior Member WallStreet NYSE

Adjusted by inflation, the dollar is ~20% above your long-term average, a level of overvaluation seen only at the extreme peaks of the 1980s and 1930s.

However, the DXY index (which measures the dollar against only 6 major currencies) fell -8.4% in the year.

My Analysis (Igor Pereira): This divergence shows that, although the dollar is weak against Euro or Yen (DXY), it remains brutally expensive against the broad coin basket of global trading partners. This makes US exports uncompetitive and pressures global corporate profits. Historically, evaluation peaks like this are followed by coordinated interventions (such as the Plaza Agreement of 1985) or marked devaluations. The dollar cannot be so expensive forever without breaking something in global trade.

The S&P 500 Euphoria: Echoes of the Point With Bubble

While the dollar pushes the real economy, the stock market lives in another reality. The S&P 500 has risen +68% in the last 36 months, the best performance of 3 years since 2021 and the second strongest since the Internet Bubble (Dot-Com) 2000.

We're 1.5 standard deviations above the historical mean return. The market has not seen a negative return of 36 months in 13 years.

My Analysis: Momentum is undeniably strong, but comparison with Point Bubble How it should be a warning. We're in rarefied territory of value and feeling. When the market enhances perfection in an overvalued dollar environment and mixed real economy, the risk of a reversal to the average increases exponentially.

We have a dollar priced for economic perfection and a stock market priced for infinite growth. History suggests that these two forces cannot coexist at these extremes indefinitely.

• The Trigger: A devaluation of the dollar (necessary for trade) could further boost stocks (in the short term) and commodities (Gold/Silver).

• The Risk: If the overvalued dollar breaks the global economy or profits of US companies, the S&P 500 bubble could burst.

We're on the edge of the razor. Protection via real assets has never been more essential.

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