In 2021 and 2022, the dollar ascended to towering heights as the Federal Reserve took the helm in tightening monetary conditions among global central banks. It was a period of a soaring dollar, backed by the robustness and stability of the American economy and its deep, liquid financial markets. The dollar, oddly enough, was the best inflation hedge of all.

During this time, the U.S. dollar continued to be the most widely used currency in international reserves and transactions. Despite challenges, such as increased U.S. sanctions on Russia, the dollar’s dominance was unshakeable. Confidence in the U.S. dollar soared, with the currency making up 58% of global official foreign reserves in 2022.

Entering 2023, the dollar looked to be in a new downtrend, but lo and behold, instead it held in a sideways pattern, surged back up, and now appears to be… dangling.

This shift in the U.S. dollar’s trajectory has been fueled by recent commentary from members of the Fed, who are adopting a dovish tone.

The past few weeks have seen the dollar move lower. The rates market has experienced a significant shift and is now pricing in more than a meaningful chance of a rate cut early next year. This on the surface would seem to be bearish for the dollar. But what if I’m still right that a credit event is coming and Japan is the catalyst? That would likely serve as a reason for the dollar to rise past the prior peak from last year, consistent with a risk-off pulse and period of heightened volatility for all risk assets.

The Bottom Line on the U.S. Dollar

I think this is particularly important here. Anyone looking at a chart of the dollar would say it looks like a double top, and that if it continues to drop, it’s risk-on bullish for stocks.

But that seems almost too obvious a path in the near term.  Even if the Fed does lower rates, that may not matter much for the dollar. Consider that yields have dropped, and the dollar has still largely remained firm. I view this as more a sign of risk-off positioning than anything else in the context. It’s also worth noting that gold’s strength against a strong dollar is indeed consistent with fear pricing kicking in.

If that’s the case, it’s not a double top. The dollar could break to new highs in the coming weeks.

The year isn’t over. I still see many disconnects and divergences that suggest we are not out of the woods. And the dollar is just another sign that things may get more volatile soon enough.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.