That is has done so amid a chorus of Dollar Doomers and Metal Bugs preaching the end of the dollar is sweet revenge. That is has done so amid the outright attempts of the Fed to debase it should be a cautionary tale for another major currency with a ton of shorts in it: the Japanese yen.
Somewhere in Basel Switzerland the clowns that run the BIS (Bank for International Settlements) are probably in crisis mode. Simon Black at Sovereign Man will need something new to write about. Janet is probably on the phone with the BoE's Carney (who's probably on the phone with BIS who's on the phone with that crazy Kuroda guy over in Japan).
At some point, there will be a large enough pullback in DXY to let these good peeps breath easier. But the damage has been done.
The damage is this: in a world awash with debt, liquidation of debt causes the underlying denomination to strengthen. Most of the world's debt is in dollars. Both default and liquidation eliminate excess dollar credits (which at this point are mostly digital) and make remaining "real" dollars more valuable.
A rising dollar makes debt more expensive to pay back. In today's situation, it is like lighting a match in a hayloft.
Robert Prechter has written about this extensively, and I thank him for helping me learn it.
The point is that if this were to happen in Japan -- if for some reason the slide in oil is a 1929-style redux of the primary signal of economic contraction before the crash -- and if global markets began to signal Risk Off in unison, the multitudes who are in levered JPY carry trades against the yen (think 50:1 leverage or higher) would cover. USDJPY could be at 60. Japan would instantly be the Land Of The Setting Sun. And the illusion of central bank "control" would cease.
Perhaps we're getting a little taste of this in the oil market. Demand has been falling for years. Supply has been steadily rising for years. But central banks have been providing stimulus for years. What if oil is the first market to react from the end of that stimulus.
Crude oil contracts, having the highest point value, are thought by some to be the most volatile, most difficult futures instruments to trade. It would make sense that Risk Off in the oil market could be leading indicator, just as it was in 2008. When oil crashed then, that's when things really got cooking to the down side in the equity markets.
A pullback in the dollar should help the metals, energy, grains, softs, and FX dollar crosses. It would keep me looking for long trades in AUD, EUR, CAD, oil, gold, and NG.
Today in the S&P, there is still a spot around 2070 that could get tested, but if yesterday's decline has teeth, the 2040s could be in the crosshairs.
Options guru Larry McMillan penned an excellent article that also just happens to equate with my working wave count. It's an excellent read.
And here is the wave count as of yesterday:
McMillan is calling attention to 2050, 2030, and 2010. I agree, only adding that 1991.40 should not be messed with.
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