The dollar index has been falling steadily since March. Initially, high tariff threats seemed to support the dollar, but over time, market confidence in both the U.S. economy and the dollar has taken a significant hit. 

While the move may appear extreme, there are growing concerns that the dollar’s reserve currency status could weaken over the long term. The U.S. economy is showing signs of incoming stagflationary pressure, rising prices combined with slowing growth due to tariffs. 

The Federal Reserve is in a difficult position. Despite recession risks, it cannot cut rates immediately due to the potential inflationary effects of tariffs. If inflation expectations become unanchored, it could take years of elevated interest rates to restore credibility. The Fed is aware of this risk and may delay rate cuts until the final quarter of the year, even if growth slows further. 

(Dollar Index – Monthly Chart) 

Despite high yields and hawkish Federal Reserve, the dollar index is falling sharply and now appears to be approaching a major monthly trendline that dates back to the 2011 bottom. 

This long-term uptrend has held for years, largely supported by the EURUSD downtrend that began in 2008. Now, the dollar index is at a crucial technical juncture. The outcome in the coming weeks could shape the future direction of the dollar’s long-term trend. 

The key support lies around 96.400, a level that has not only defined the structural uptrend but may also represent the strongest support for the dollar in over a decade. 

(Dollar Index vs Citi FX USD Pain Index) 

There’s another major risk building for the dollar index: the sharp decline has caught many dollar bulls off guard. 

The Citi USD Pain Index, which tracks positioning and highlights how crowded long-dollar trades are, has been sitting at elevated levels since the dollar last tested 110. This suggests that a large number of bullish USD positions are sitting on big unrealized losses, setting the stage for a potential bigger long squeeze. 

What’s more concerning is that the pain index has started rising again recently, indicating that traders are doubling down, expecting the long-term dollar trend to hold. 

Even a false breakout below the long-term monthly trendline could be enough to shake confidence and force capitulation among dollar bulls. Such a move could trigger a sharp exit from long positions, causing a sudden and severe drop in the dollar. 

This is a significant risk that should not be overlooked. 

(Dollar Index – Daily Chart) 

In the short term, the break below the 99.60–100.80 support zone was significant. However, the dollar index has not moved far below this area, and it now serves as the nearest key resistance to monitor. 

Unless this zone is reclaimed, bearish pressure is likely to persist, potentially driving the index toward the 96.40 long-term trendline, a level that could ultimately determine the broader direction of the dollar. 

Traders should stay cautious of false breakouts in either direction, as these are more common when positioning becomes overly crowded on one side of the market.