Can You Spare a Buck?

It's been a tough ride for the USD since March, not so much of a roller-coaster as a Double Black Diamond slope. The USD peaked earlier this year due to extreme levels of fear and uncertainty in the global financial markets. The end of the world seemed like a done deal and the all-mighty Dollar was everyone's bet (mostly in the form of US treasuries), in what was dubbed the "risk aversion" trade. Since March, however, the  USD declined, in a twisted way, on every piece of good news that would normally make a currency stronger. And thus came about the "risk trade". With historically low interest rates and generous QE, the dollar was left alone and defenseless, surrounded by some very scary bears with their claws sharpened and ready for the attack.

Vociferous pros eulogize the greenback daily on various financial media outlets and foreign governments diversify their reserve holdings with gold (India) and Canadian Dollar (Russia). Indeed, the currency has not been able to stick its head above the 10 EMA (weekly, see below) since May. However, even among the big bears out there, there seems to be a growing consensus that a bear rally is in the cards and Friday's market action could have signaled the opening shot.

Fundamental, meet Technical

Fundamentally speaking, there are two scenarios in which the USD slide can reverse, even if only for a relatively short period, and they are (1) deterioration of financial markets and return to risk aversion or (2) interest rate hike by the Fed. Technically speaking, the DXY (aka dollar index) is entering a support level (see weekly chart below) in the 74.50 to 71.50 range.
It always astonishes me when trend-shifting fundamental news "magically" coincide with major technical levels. Over the past two weeks, the DXY came close to a major weekly support level and, wouldn't you know, we got a taste of both bullish scenarios for the USD.
The first came in the form of financial turmoil in Dubai (risk aversion). The second came a week later in the form of much better than expected NFP numbers, causing markets to expect rate hikes earlier than previously predicted.
Of the two events, Friday's NFP report was much more significant because while the reaction to Dubai World's woes was according to expectations, the reaction to the NFP numbers marked the first time in months when a good economic reading led to a stronger dollar signaling a possible break from the inverse relationship between the dollar and the state of the economy (and the equities marker).

Obviously, it is too early to to tell if the dollar rally will fizzle or sizzle and the dollar bulls should hold off on the champagne - at least until New Year's.