Although we wrote up Tuesday’s ballistic rally as little more than a meaningless gusher of mass hysteria, most of it short-covering, we were still surprised at how quickly it receded back into near-nothingness. Nearly two-thirds of the Dow Industrials’ gains vanished with yesterday’s 293-point decline, providing fresh evidence that investors are not nearly so ebullient as the nightly news commentators would have us believe. However, it was not the cascade in stocks that deserves comment, but rather the across-the-board selloff in commodity markets. Gold was down $58, ending a six-day winning streak that took quotes above $1000 for the first time, and the price of a barrel of crude fell by nearly 5%, to $104.48. Some of the agricultural contracts were limit-down, retracing parabolic spikes at the same steep pitch as the rallies that had created them.

Some saw the collapse in commodities as signaling a reversal of the dollar’s long slide. If so, we lack the imagination to see how this trend could persist for more than a few days. Someone in the Rick’s Picks chat room mentioned that he’d never seen sentiment swing so heavily against any investable as it has against the dollar. We wouldn’t argue otherwise, since it is true that the dollar has few friends in the world right now, and almost no one expects it to turn around any time soon. But there are good reasons for its pariah status, and they seem likely to persist for the foreseeable future. We note that “Helicopter Ben” Bernanke has lived up to his nickname, and nothing he has said or done in the last six months would suggest that the value of the dollar is much of a concern to officialdom. Treasury’s Paulson mentioned the need for a strong dollar in a speech he gave the other day, but considering the context, it was probably just a slip of the tongue

“Long Squeeze”

But to infer that overwhelmingly bearish sentiment alone could cause the dollar to rally is to ignore certain realities of the marketplace. The implication is that large short positions that have been constructed against the dollar by leverageurs could be squeezed, sending the greenback soaring in relationship to other currencies.  But dollars are not like stocks that sometimes get short-squeezed when demand spikes precipitously into limited supply. In fact, the amount of dollar-denominated assets in search of bidders these days is practically unlimited. Under the circumstances, it is a continuation of the “long-squeeze” on a manifestly doomed dollar that we should expect, not panic-induced short-covering. Sure, the buck is long overdue for one of those ten-percent rallies that is supposed to prove that nothing of value rises or falls in a straight line. But he who says the dollar must rally much more than that should be made to say why.

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