A Devastating Dollar Short-Squeeze Is Gathering Steam

The Dollar Index has blasted through key resistance at 80, threatening to “unwind” carry-traders who borrowed dollars for next to nothing in order to speculate on other assets. Chief among those assets is gold, which got savaged yesterday in a $100 selloff that seems hell-bent on testing September’s key low. The low lies at 1543, basis the Comex February contract, but we doubt that it will hold. In fact, earlier, we had told subscribers there was a 60% chance that February Gold was about to dive to at least 1459, a technical target derived from our proprietary Hidden Pivot Method. We shall see. In any event, gold and silver – as well as crude oil, the euro and the commodities complex– will come under heavy selling pressure if the short-squeeze on the dollar continues.

Concerning the U.S. dollar’s powerful surge, although it was driven initially by fears over the possible collapse of Europe’s financial house of cards, the rally has taken a life of its own that is being driven by dollar short-covering. The buying is not yet at panic levels, but a surge will be impossible to stop once if it picks up any more speed. Although the central banks can affect the markets for a short while with talk of bailouts, all of them acting together are puny relative to the quadrillion-dollar juggernaut that is about to fuel an unwind of the dollar carry-trade. Over the years, we’ve written many times about this potential Mother of All Short Squeezes. The paradox was, and is, that the dollar is intrinsically worthless, a form of debt rather than money. In point of fact, as we have pointed out here numerous times, the $20 bills in your wallet are worth no more, fundamentally, than the $1 bills. Even so, that’s not going to help the Masters of the Universe who borrowed dollars promiscuously in order to leverage them to the sky.

From a technical standpoint, we’ve been expecting the NYBOT Dollar Index to hit a Hidden Pivot rally target at 81.11 and then back off. The surge is closing on that number now, up from around 75 in late October. But if the pivot resistance gives way easily — and especially if buyers re-energize the rally by pushing above the 81.44 peak recorded last November – the central banks and all those who are short dollars are in for some very rough sailing. So will those who have been betting on a politically-induced rally in the euro. Our target for the March 2012 contract is 1.2556, and we expect it to hold. If not, the fragile credit edifice that has been holding Europe together is all but certain to crumble.