Dollar's Critical Breakdown: Why 96.85 Support Is the Next Stop Before More Weakness

The US Dollar Index just delivered what many of us have been anticipating for months—a decisive breakdown below a critical ascending trendline that had been providing support since late 2021. At 99.202, we're witnessing a pivotal moment that sets the stage for significant near-term weakness, with 96.85 serving as the next major target. But here's where things get really interesting: even if we see a bounce at that key support level, the bigger picture suggests this is just the beginning of a longer-term weakening cycle for the greenback.

The Technical Picture Paints a Clear Story

Looking at this multi-year chart of the Dollar Index, we can see a textbook triangle formation that's been developing since early 2022. The descending resistance line connecting the highs has been systematically capping rallies, while the ascending support trendline has been providing a floor for the dollar's declines. This converging pattern created what technical analysts call a "coiling" effect—like a spring being compressed tighter and tighter until something has to give.

Well, something just gave, and it wasn't in the dollar's favor.

The recent breakdown below that ascending support trendline is particularly significant because it occurred after multiple failed attempts to break above the descending resistance. Notice how price action tested that upper boundary earlier this year, got rejected, and then rolled over decisively. This "retrace rejection" pattern often signals that the path of least resistance has shifted lower.

What's especially compelling about this setup is the confluence of technical factors all pointing toward continued weakness. The white horizontal support line at 96.85 represents not just a mathematical target, but a level where multiple technical elements converge. It's where previous swing lows found support, and it sits roughly at the lower boundary of this multi-year range.

Why the Bounce at 96.85 Will Likely Be Temporary

Now, I fully expect we'll see some kind of bounce when the Dollar Index reaches that 96.85 support zone. Markets rarely move in straight lines, and after a move of this magnitude, some profit-taking and short-covering is natural. But here's the key insight that separates successful traders from the rest: understanding that a bounce doesn't necessarily mean a reversal.

The fundamental backdrop supporting this technical breakdown is so compelling that any relief rally is likely to be viewed as a selling opportunity rather than the start of a new bull market for the dollar. Let me walk you through why the cards are stacked against the greenback over the longer term.

The Debt Ceiling Time Bomb

The Congressional Budget Office's latest projections paint a sobering picture: the federal budget deficit is expected to hit $1.9 trillion in 2025, with federal debt rising to 118 percent of GDP by 2035. This isn't just about numbers on a spreadsheet—these debt dynamics create real pressure on currency values over time.

Recent legislative proposals could add over $1 trillion to annual deficits by 2034, and Moody's has already downgraded US debt, citing concerns about years of fiscal irresponsibility. When rating agencies start questioning America's creditworthiness, it's a wake-up call that global investors are paying attention to.

What really strikes me about this situation is the timing. We're seeing deficit levels that would typically occur during economic crises, yet unemployment remains relatively low. This suggests structural issues that go beyond normal cyclical patterns. Countries that consistently spend more than they earn eventually face currency pressures—it's an economic reality that even the world's reserve currency can't escape indefinitely.

Federal Reserve Policy: Between a Rock and a Hard Place

The Fed has maintained its benchmark rate at 4.25%-4.50%, but markets are pricing in three to four rate cuts for 2025. Here's where the psychology becomes fascinating: the Fed is caught between controlling inflation and supporting an economy showing signs of strain.

The US economy actually contracted 0.2% in the first quarter of 2025, marking the first decline in three years. While some of this was due to trade dynamics and front-loading ahead of tariffs, it underscores the fragility beneath the surface.

When central banks are forced to cut rates to support growth while dealing with structural fiscal imbalances, it creates a perfect storm for currency weakness. Lower interest rates reduce the appeal of dollar-denominated assets, while ongoing deficit spending continues to flood the world with dollars.

The De-Dollarization Movement Gains Momentum

Perhaps the most significant long-term threat to dollar dominance isn't visible on any chart—it's the coordinated effort by major economies to reduce their dependence on the US currency. The BRICS bloc now represents over half of the world's population and a substantial portion of global GDP, with 44 countries now aligning with de-dollarization initiatives.

Recent developments include Iran and Russia completely eliminating the dollar from their bilateral trade conducting transactions exclusively in rubles and rials. China's digital yuan and projects like BRICS Pay are creating alternative payment systems that bypass traditional dollar-based infrastructure.

This isn't just theoretical anymore. The renminbi's use in China's cross-border transactions has grown from around 20 percent to approximately 50 percent between 2016 and 2022. While the dollar still dominates global reserves, the trend is clearly moving in the opposite direction.

What's particularly concerning for dollar bulls is that this movement has accelerated precisely when America's fiscal position has deteriorated. Countries are diversifying away from the dollar at the same time the US is creating more of them through deficit spending.

Trade Dynamics and Economic Rebalancing

The March trade deficit surged to $140.5 billion, representing a 92.6% increase from the same period in 2024. While trade deficits aren't inherently problematic, persistent imbalances of this magnitude require continuous capital inflows to finance them.

Recent tariff policies have created significant disruption in supply chains and inventory management, with businesses struggling to navigate the uncertainty. These trade tensions aren't just affecting specific sectors—they're changing how global businesses think about currency exposure and supply chain risk.

The irony is that policies designed to strengthen America's trade position may actually accelerate the very trends they're trying to combat. When the US becomes a more difficult trading partner, other countries naturally seek alternatives—including alternative currencies.

The Psychology of Currency Cycles

From a behavioral perspective, what we're seeing fits classic patterns of currency cycle transitions. Major reserve currencies don't collapse overnight; they gradually lose their monopoly status as alternatives become more attractive and viable.

The dollar's strength over the past decade was largely built on the "cleanest dirty shirt" principle—it was the best option in a world of problematic alternatives. But that dynamic is shifting as other economic blocs develop more robust financial infrastructure and greater economic integration.

Currency dominance is ultimately about trust and convenience. When both factors start eroding simultaneously—as we're seeing with fiscal concerns and de-dollarization efforts—the effect can be self-reinforcing.

What This Means for Traders and Investors

The technical breakdown we're witnessing isn't happening in isolation. It's occurring against a backdrop of fundamental shifts that suggest this move has more room to run. The 96.85 target isn't just a line on a chart—it represents a crucial test of whether the dollar can find meaningful support before potentially breaking down to even lower levels.

For traders, the strategy seems clear: use any bounce at 96.85 as an opportunity to position for further weakness rather than betting on a reversal. The confluences of technical breakdown and fundamental headwinds creates a compelling risk-reward setup for those positioned correctly.

For longer-term investors, this environment requires rethinking traditional dollar-centric portfolios. Diversification into other currencies, commodities, and international assets becomes more important when the reserve currency faces structural challenges.

The Road Ahead

Looking forward, the dollar's path seems increasingly clear. The immediate move toward 96.85 is likely just the first leg of a broader weakening trend. Even if we see a bounce at that level—which I expect we will—the fundamental drivers suggesting continued dollar weakness aren't going away anytime soon.

The combination of unsustainable fiscal dynamics, changing Fed policy, accelerating de-dollarization efforts, and shifting global trade patterns create a perfect storm for continued greenback weakness. This isn't a temporary cyclical move; it's the beginning of a structural shift in how the world thinks about and uses the US dollar.

As traders and investors, our job isn't to fight these trends but to position ourselves to benefit from them. The chart is telling us a story, and the fundamentals are confirming it. Sometimes the best opportunities come from recognizing when multiple factors align in the same direction—and right now, they're all pointing toward a weaker dollar.

The breakdown has begun. The question isn't whether the dollar will reach 96.85, but what happens next after it gets there. Based on everything we're seeing, that bounce is likely to be brief, and the path lower is likely to continue well beyond that level.