Dollar Through Japanese Eyes

If the yen moves through the 125 area, a 20-year inverse H&S completes. Target 175. At 175, nearly 40 years of gains are gone. It also makes another base, with a target of 275. It's the logical target area when looking at the chart. The plunge from around 265 to 165 was engineered by the G7 in 1985, the Plaza Accord. It was very fast and moves like that are typically reversed quickly. It should take years or a decade-plus for this to play out.

The euro is also coming up on long-term support.

In context of yen and euro, DXY looks like it may be sporting a 7-year bull flag pattern. The target out of that move would be 120. That would take it to the 2002 high. That creates a 50-point base pattern with a target of 170, slightly higher than the 1985 peak.

The most likely death sequence for the U.S. is something like the above. The fatal flaw in all the "death of the dollar" arguments is that they studiously ignore that almost every country is in worse financial shape. There are two ways things will play out. One is that every currency collapses together slowly, sort of like has happened in the past couple of years. The dollar would weaken in this scenario, but relatively. Crude oil would go up 100 percent in dollars, maybe 80 percent in euros and yuan, but it would look like a normal dollar bear market amid a general inflation in money and credit. The dollar eventually tumbles like the British pound failed in the 1970s, because it keeps spending like it has an empire financing its debts.

The alternate scenario is rapid debt default. U.S. dollars are destroyed, triggering short-squeezes in dollar markets. Every single debtor is short U.S. dollars; they must obtain dollars to pay back their debt. If they cannot pay, they default. If they default on a dollar bond, the person holding it loses the "dollars" they held on paper. Could the Federal Reserve bailout the world? Debatable within the current context of geopolitical fracture. Also, consider the dynamic of inflation boosting the dollar. Europe is importing US natural gas, Japan imports food and energy. If the U.S. tried bailing out the yen and euro by inflating the U.S. dollar, and this caused concentrated price explosions in oil, natural gas and wheat, would it help the euro and yen or further weaken them? The yen is collapsing versus most major currencies and the euro is on deck because of inflation from 2020-2022. How do you inflate out of a crisis caused by inflation?

Finally, the takeaway isn't that this scenario will fully play out. It's that the yen is screaming trouble and that if the euro joins it, there is a very clear— albeit low probability— path back to the all-time high for DXY. An intermediate-term scenario is a recession/deflation that takes DXY to the 120 area. That could mark a peak and then the USD falls. Maybe that's all that's left for the greenback before its long descent. The possible moves outlined above will fade from possibility as DXY's outlook moves from bullish to bearish. Such a move to 120 would also correlate with the early 2000s bear market. Back then oil bottomed 2 years earlier, Russia defaulted, tech/growth stock drove the bear markets, commodities made a higher low before breakout out...there are several parallels that make one wonder...