Will a Dollar Rally Stop the Asset Reflation Story?

| About: PowerShares DB (UUP)

It's so amazing how the rally we've seen in stocks, commodities, emerging market assets and gold are all dependent on a single factor: the US dollar weakness. I mean, it has been a no-brainer. US dollar down, bonds down, everything else up. Now with the dollar index rallying 0.70% last night, voila! We had this massive reversal in stocks, gold and commodities. Now with so much of the asset reflation story hinged on just this one phenomenon, could a rally in the US dollar force a massive unwinding of trades in the related assets?

The US dollar index is now trying to peek above its major downtrend line, and a rally could bring it to $79 to $80. Still, this is considered a reversal process and reversals don't go straight up from the bottom. So I'd expect $80 resistance to be strong. So while a rallying US dollar may be a concern in the short-term, it may be a welcome development in bringing out a healthy correction before the next leg up in the asset reflation story. While the model portfolio is short, it is just a trade to take advantage of the potential swing downwards. I would look to re-accumulate long positions at relevant support levels.

Disclosure: None