The Dollar To Shock & Awe ?

Among other positions, we are short the euro (EURUSD) from September 2nd and the British pound (GBPUSD) from Monday's overnight session.

Last week the euro broke down from a multi-month congested range (after a slight headfake higher), and the pound cratered hard on Europe's rough start to the week.

Now even the commodity currencies (Aussie , AUDUSD and USDCAD) are starting to soften...

Don't look now, but the US dollar -- which has pretty much been left for dead -- could rise up like Lazarus and surprise a lot of folks.

Maybe Switzerland's decision to peg the franc to the euro -- echoing the old deutchsmark peg back in 1978 -- was a wake-up call of sorts. The current state of the forex market is wacky (to say the least), and the dollar's weakness could be coming to an end.

Some argue the greenback's failure to rise in a period of "risk off" duress shows how the old order things is fading.

But couldn't that be a premature statement?

And do we really know what' s happening behind the scenes -- as with, say, China backing euros, as Soros intimated to Spiegel?

(That kind of activity is all the more prone to reversal once it stops, or after the campaign is gradually abandoned.)

 

Leaving aside the hairball fundamentals of "Lehman 2.0" and "SSDD" Europe -- Same Spiral, Different Day -- we can casually observe that:

• The Federal Reserve has thrashed the dollar like a red-headed step child. Traders are so reflex conditioned, Pavlov style, that Bernanke can clear his throat and the $USD cowers.

• The European Central Bank (ECB) has been bizarrely, pathologically committed to austerity - an inverse image of the Fed.Trichet and co. would be worried about inflation in the middle of the Great Depression. Oil could be trading back at $40 and they'd be nervous. Hence the sense they would let the euro climb to $1.60 and strangle off the entire periphery if they could.

• And yet, those "knowns" are thoroughly known (priced in). What isn't known is what happens when the Europe situation finally spirals out of control (after the umpteenth threat of doing so)... how burned Swissie buyers will respond (safe haven no more, leg-chained to the experimental euro)... and how much ammo the Federal Reserve actually has left. (What more can they throw at the poor ol' buck?)

• Meanwhile undiscounted scenarios like China breakdown, Euro zone bank implosion, U.S. investor capital repatriation, and most importantly the prospect fora dollar short squeeze (think of all those dollar-bond geniuses like Venezuela's Chavez) have not been priced in.

Perpetual T-bond bears (like Bill Gross) have been smoked in recent months. Will perpetual dollar bears be next? Who knows...