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The current market environment is, in many ways, reminiscent of 2008. Once again, debt and liquidity issues are front and center, and there is a chance that things could get much worse. The banking sector is at serious risk. Commodity inflation and housing deflation are dueling. The world's economy is in - or at risk of entering - recession. The markets have fallen from their highs, and are at risk of finding significantly more downside. To that list of similarities, we can now add the behavior of the US Dollar, which has finally remembered its role as a "safe haven" currency.

So the Dollar is rallying. "Yay" for the the US Dollar. So what? Well, this is eerily similar to how the US Dollar behaved in 2007-2008. As the S&P fell over 20% from its 2007 highs, the US Dollar fell in sympathy (while commodity prices rocketed... sound familiar?). Until, that is, about one month before Lehman, and the crash.

I'll throw up one final chart in which I've included the S&P and US Dollar for both 2008 and 2011, looking at them in coorelative year-to-date fashion.

What are the chances that the Dollar rally continues from this point forward? I would suggest a few things have happened in the last week or two that dramatically improve the likelihood of a sustained Dollar rally. For one, the Swiss National Bank has pledged to weaken the Swiss Franc, and the Franc itself is facing significant technical resistance, as is gold. Commodity indexes are looking toppy. Each of those have one thing in common (aside from me referencing one my favorite market technicians, Chris Kimble, for the charts): all three tend to be inversely coorelative to the US Dollar. A sell-off in those assets would typically coorespond with a bullish period for the US Dollar.

A US Dollar rally in and of itself isn't necessarily bad for equities. The US Dollar rallied from late 2009 until the middle of 2010, and the market did okay (it basically traded sideways: up, then back down). There are plenty of good things that would come from a Dollar rally - like lower commodity prices and the possibility of increased foreign investment in the U.S.

That said, we haven't seen an extended synchronized rally in both U.S. equity markets and the Dollar since the late 1990s. My own feeling is that we aren't about to re-enter the glorious late 90s. I have noted in past articles that margin debt remains high, and volatility has been astonishing in recent months. Goldman Sachs noted that August was in the 98th percentile of most volatile months since 1928, and as I noted in this article, intense and incessant volatility tends to occur in falling markets, not rising ones.

In my opinion, it adds up to grounds for continued defensive positioning, and a Dollar rally here could be an omen of severe disquiet in the near future. There are a variety of ways to position a portfolio for continued US Dollar strength. UUP (NYSEARCA:UUP) is a 1x long US Dollar ETF offered by PowerShares. An indirect way to benefit from US Dollar strength is to position for Euro weakness, via EUO, a 2x short Euro ETF from ProShares. Skirting the currency issue, and instead focusing on likely repercussions, one could use SMN (NYSEARCA:SMN), a 2x short basic materials ETF from ProShares. But perhaps the easiest solution for most U.S. investors is to simply go to cash. It's been a while since U.S. investors could sit in cash, risk-less, without watching their purchasing power whittled away.

Disclosure: I am long EUO.

Source: For The U.S. Dollar, It Might Be 2008 All Over Again