A significant shift in market dynamics is quietly unfolding, and it’s one that’s flying under the radar for many investors. Otavio (Tavi) Costa recently pointed out a major change that’s occurring in the currency markets—specifically regarding the U.S. dollar. The dollar, which for so long had been considered a safe haven during turbulent times, is now beginning to lose its appeal. If the dollar’s no longer the go-to in times of crisis, what’s left to trust in?
Last week, we saw the largest decline in the DXY index, coinciding with a drop in the S&P 500 that hasn’t been seen in three decades. The significance of this move is not lost on those paying attention. It’s hard to ignore the fact that the U.S. dollar, once the bedrock of stability in times of turmoil, is now losing its grip as the preferred safe haven. Investors are turning to alternatives like gold and even the yen as the dollar shows signs of fatigue.
The situation isn’t entirely unprecedented. Costa pointed out similar periods in history, such as between 1974-1975 and 1976-1978, when the dollar similarly faltered during market downturns. What’s different now is that this shift could be even more pronounced, with the dollar potentially entering a phase of significant devaluation. When the dollar becomes overvalued, history shows that it’s only a matter of time before it faces a reckoning.
We’ve seen this before in the 1980s and again in the 1930s. Each time the dollar hit extreme overvaluation, it led to a massive devaluation relative to other currencies. This shift from the dollar to hard assets like gold could be the beginning of a new era for investors who are starting to question the long-term stability of the U.S. dollar.
As Costa notes, the shift in sentiment isn’t drawing as much attention as it should. Many are still blind to the risks that the U.S. dollar carries, despite the clear signs that it’s no longer the safe haven it once was. The shift could be subtle at first, but it’s building—just like the unforeseen developments in the Treasury market post-pandemic. If history is any guide, this is just the beginning of what could be a major change in the global financial landscape.
And there’s something even more concerning on the horizon: the stagflation bomb. Traders are now betting on a Volmageddon-style crash, signaling that the worst may be yet to come. If the dollar is losing ground and inflation is creeping higher, we could be heading straight into a financial storm that many aren’t prepared for.
Sources:
https://x.com/TaviCosta/status/1899300756123009152
https://x.com/NorthstarCharts/status/1899464521753788788