Why a USD Bounce Could Trigger a Stock PullbackU.S. Dollar Currency IndexTVC:DXYquickshiftinnThe US Dollar has faced brutal selling during the first half of 2025. Some are even questioning whether the Dollar’s global hegemony is at risk. Early in the year the US stock market SPY sold off aggressively, falling 19% from mid‑March to early April. Since then stocks have more than regained their losses and the Dollar is still in the tank. So where does that leave us for the rest of the year? The Dollar Inverse Correlation The US Dollar has an inverse correlation to most everything. Stocks, bonds, crypto, commodities, real estate — all are measured in Dollars. Therefore when the Dollar loses value, all things equal it takes more of them to reach the same value those assets were denominated at before. Conversely when the Dollar rises, other assets lose value in Dollar terms. Here we can see a long standing inverse correlation to stocks SPY Dollar in oversold territory The Relative Strength Index (RSI) is a momentum oscillator that measures the magnitude of recent price changes on a scale from 0 to 100 to help identify overbought (above 70) or oversold (below 30) conditions. The Dollar has hit oversold several times so far this year, but not yet staged a material recovery. Stocks in overbought territory Meanwhile stocks have staged a blistering rebound off the "Liberation Day" driven selloff earlier this year. The S&P 500 now sits at an all‑time high, and you guessed it, has tapped overbought twice this month. USD is fundamentally attractive Because investors seek to earn the highest available yield on their capital, they tend to move funds into currencies offering higher interest rates (and away from those with lower rates), so differences in policy rates across countries create incentives for cross‑border borrowing and lending that drive FX flows. For example the Fed (USINTR) is at 4.5%, and the ECB (EUINTR) is at 2.15%. Moreover the Dollar is down significantly against major trading pairs that have lower yields. In our prior example the Dollar is down 11.98% against the Euro YTD (1-EURUSD), leaving substantial room for capital gains. Gravity could lure FX traders back in the second half of 2025. Tariff calculus Tariffs tend to bolster the imposing country’s currency in two main ways: by making imports more expensive they reduce import volumes, improving the trade balance (i.e. fewer foreign‑currency outflows), and by collecting duties in domestic currency the government effectively withdraws that currency from circulation, increasing its relative scarcity. Both effects lift demand for—and support the value of—the home currency. Putting it all together Despite the DXY’s ~10.8% YTD slide and repeated oversold conditions, the compelling carry trade sets the stage for a USD bounce that, in turn, could pressure overextended equities. With stocks stretched and the Dollar oversold, the carry‑driven rebound in USD could well presage a pullback in equities. Stocks are expensive, Dollars are cheap 🤑