A simple question… but a decisive one for your portfolio
The question is very easy to ask: is the strong dollar cycle coming to an end? But the answer has deep consequences for almost any portfolio, especially if you live in Europe and think in euros.
At Campus Opciones I usually sum it up like this: if the dollar strengthens, certain dollar-denominated assets do better; if the dollar weakens, the leadership changes hands. That’s why in this article I’m sharing the three signals I use to assess where we are in the dollar cycle and whether it makes sense to adjust exposure.
Why the dollar affects you even if you’ve never traded EUR/USD
Even if you don’t trade Forex, if you hold dollar-denominated assets (US stocks, ETFs, US bonds, commodities priced in USD…) the dollar cycle affects you on two fronts:
On one hand, there’s the currency effect: if the dollar rises against the euro, your USD assets are worth more when converted back into euros; if the dollar weakens, the opposite happens. On the other, there’s the effect on global risk appetite: a very strong dollar tends to go hand in hand with financial stress, whereas a weaker dollar usually favours emerging markets and commodities.
In other words, it’s not just about the EUR/USD chart: it’s one more piece of the puzzle of how your portfolio is going to behave over the coming months.
Signal 1: the Dollar Index future and the 200 MA
The first signal I look at is very visual and very simple: the Dollar Index future (the contract on the dollar index against a basket of major currencies), with a 200-period weighted moving average.
On a platform like ProRealTime, I load the dollar future chart and overlay that 200 MA. From there, the read is straightforward:
As long as price stays consistently above the average, I accept that the structural bias of the dollar is bullish. If price breaks through the average and holds below it, the bias turns bearish. It’s not magic, but it gives me a clear framework so I don’t fight the underlying move.
Signal 2: the “two-year rule” between the US and Germany
The second signal has to do with short-term interest rates. I look at the spread between the 2-year US Treasury note and the 2-year German Bund.
If the 2-year Treasury yield is clearly above the Bund’s and that spread widens in a sustained way, the message is that the dollar has a tailwind: global capital is rewarded for parking money in dollar-denominated assets.
If instead the spread narrows persistently, or even flips, the US’s relative advantage shrinks and the dollar loses its appeal. It doesn’t need to move every day; what matters is the trend of that spread.
Signal 3: four macro data points against market consensus
The third signal is a small dashboard of four US macro data points compared against market consensus. The ones I usually watch are:
1. The non-farm payrolls (job creation).
2. The core inflation reading (excluding food and energy).
3. The ISM services index.
4. The retail sales figure.
If over the past month three of these four data points come in better than expected and Europe doesn’t surprise particularly to the upside, the dollar tends to get extra momentum: the narrative is one of a stronger US economy.
Conversely, if three of the four come in worse than expected and Europe starts beating forecasts, it’s reasonable to think the dollar may lose steam in the following stretches.
The goal isn’t to build an academic model, but to have a practical read to decide whether I want more or less exposure to dollar-denominated assets.
How I turn this into portfolio decisions from Europe
With these three signals, what I do is classify the environment into two simple scenarios:
If the dollar is in a strong cycle (Dollar Index above the 200 MA, the 2-year spread in favour of the US and solid macro data), I tend to be more comfortable with:
more exposure to dollar-denominated assets, and less weight in emerging markets and commodities, or at least being very selective.
If the dollar enters a phase of weakness (price below the 200 MA, a narrowing spread and softening macro), I have more reasons to:
gradually rotate part of the portfolio towards assets that tend to benefit from a softer dollar: emerging markets, certain cyclical sectors and commodities.
How to express it in the market if you don’t trade Forex directly
Many brokers —and if you work with ProRealTime with Interactive Brokers you’ll already know this— have regulatory limitations on trading spot Forex directly.
That doesn’t mean you can’t put your view into practice. You have alternatives such as:
1. Futures: for example, the euro/dollar future or the dollar index future itself. They’re regulated instruments, with a clearing house, and they fit well into the usual futures and options workflow.
2. ETFs and exchange-traded products linked to the dollar, which let you adjust currency exposure without entering the classic spot market.
All the prior analysis —charts, moving averages, key levels— I keep doing in ProRealTime; then I decide whether the best way to express it is via futures, options or simply with adjustments to asset allocation.
What you should take away from all this
The strong-or-weak dollar cycle isn’t just another press headline: it’s one of those variables that, in the background, keeps shaping the behaviour of many pieces of your portfolio.
With three very concrete tools —the Dollar Index chart with a 200 MA, the US–German 2-year yield spread and four key macro data points versus consensus— you can build a reasonable map of which phase we’re in and adjust your exposure sensibly.
And, as always, the idea isn’t to predict the future down to the millimetre, but to stop flying blind on a variable that weighs far more heavily on your wealth than it seems at first glance.
