By the time you finish reading this essay, the U.S. national debt level will have increased by another $29 million.
Over the past year, the debt level has ballooned by nearly $8.5 billion every day to reach $34 trillion.
Economists and investors alike keep forecasting a debt-driven doomsday scenario for the economy and stock market.
But it hasn’t arrived just yet.
Those same forecasters are missing one key element as they monitor the possibility of a debt crisis.
To know when the national debt level is about to catch up to us, you need to pay attention to this key chart…
Tracking Demand for Dollars
To understand the debt situation, you need to watch the U.S. dollar.
Growing concerns about the U.S.’s ability to repay its debts and fulfill financial obligations should be matched by the dollar breaking down against other currencies.
That’s why the U.S. Dollar Index (DXY) gives us some important levels to watch.
DXY measures the dollar against a basket of other currencies like the euro, pound, and yen.
When it’s moving higher, the dollar is strengthening against other currencies – and vice versa.
Now let’s take a look at what the chart below is telling us.
DXY peaked in September 2022 at its highest level in over 20 years (shown with the arrow). Yet the dollar pulled back toward the 100 level into February 2023, starting a downtrend.
And since then, the dollar has been trading in a wide sideways range.
The 100 area remains support (the lower green-shaded area) while resistance rests around the 105 to 107 level (upper reddish-shaded area).
What the dollar does next at these levels will tell you a lot about the growing possibility of a sovereign debt crisis within U.S. borders.
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Is Debt a Growing Concern… or Not?
After testing support near the 100 level at the start of the year, DXY has risen to 105 on two occasions in February and recently at the start of April.
But during those rallies, the relative strength index (RSI) failed to extend into overbought territory above the 70 level.
And the most recent test of 105 at the start of April saw a lower high compared to the RSI in February.
Both developments are a sign of price weakness, which suggests that the downtrend is still intact.
And there are two new developments to watch now.
DXY pulled back the past couple of days. Yet it’s now finding support at the 50-day moving average (the black line in the chart).
If the dollar can rebound off the 50-day moving average and break back above the 105 area, that will be a sign that investors are still yawning at ballooning levels of U.S. debt.
But cracks in the dollar’s foundation will show up in any move below the 50-day moving average that goes on to test support back at 100.
So watch for a weaker dollar to signal growing concerns over a sovereign debt crisis, especially a major breakdown below the 100 level with the RSI staying below 50.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict