The Dollar Index is falling rapidly. With the break below 100, market sentiment has turned sharply bearish. 

This journey below 100 began with Trump’s tariff policy. Initially, traders saw the tariffs as a potential advantage for the U.S. dollar. The thinking was that tariffs would reduce the trade deficit, slightly boost inflation, keep the Fed hawkish for longer, and strengthen the U.S. position in trade negotiations. Based on those expectations, the Dollar Index climbed to 110 and tested that level multiple times. 

However, Trump turned out to be more aggressive with tariffs than most had anticipated. Even with potential deals in place, it now appears that high tariffs are here to stay. That changes the outlook significantly. Tariffs are inherently stagflationary. While moderate tariffs can protect local industries and encourage domestic investment, a rapid and excessive increase gives the economy little time to adjust. Import prices surge while economic confidence collapses. The adjustments of local businesses could take years to compensate for the loss of imports. Recent data is showing early signs of these effects, and markets are already pricing in potential damage. 

Adding to the pressure is rising concern over the Federal Reserve’s independence. Trump’s recent speeches have raised questions about the Fed’s ability to operate without political influence. History has shown that when central banks lose their independence, they often maintain interest rates lower than necessary due to politically motivated growth agendas. This typically results in higher inflation and weaker currencies. 

As confidence in the dollar and U.S. Treasuries begins to erode, long-term bond yields may remain under upward pressure, even if U.S. debt levels somehow decline. The combined weight of aggressive tariffs and a potentially politicized Fed is casting a long shadow over the dollar’s outlook. 

(Dollar Index – Weekly Chart) 

Focusing on the Dollar Index, the break below 100 has accelerated the decline toward the long-term uptrend line that began in 2011. If pressure on the Fed continues at this pace, the downward move could extend until the index tests that key trendline. What happens after that remains uncertain. 

The weekly RSI has now dropped below 30. Historically, when the RSI falls below or near 30, it often signals that the dollar is either at or very close to a bottom. Combined with the proximity of the long-term trendline, this technical setup suggests that the dollar may be nearing a key support area. 

While the short-term outlook remains under pressure, these signals raise the possibility that a bottom may be forming soon. 

(Dollar Index vs Citi Dollar Pain Index) 

But a hidden danger may be lurking for the dollar. The chart above shows the Dollar Index alongside the Citi Dollar FX Pain Index, which tracks positioning stress in the FX market. The data reveals a significant number of dollar long positions still open and currently under pressure with notable unrealized losses. 

This setup creates the potential for a long squeeze. If the dollar continues to fall, it could trigger a wave of position unwinding and forced liquidations. In such a scenario, a sharp retreat could follow, possibly even breaking below the long-term trendline especially if panic selling begins. 

That kind of move could create multiple traps, both for dollar bulls expecting a bounce at support and for fresh dollar shorts who assume the trendline has broken for good. Because of this, traders should tread with caution and be prepared for a choppy, volatile zone rather than a clean directional move near the trendline.