Climbing Dollar's Potential Impact on Commodities

The most salient feature of our comparison chart between the U.S. Dollar Index (DXY) and the Reuters/Jefferies CRB Commodities Index (CRB) is the recent climb in the DXY off of its May 1 low at 78.60 towards another test of a 2-year resistance plateau at 81.40/80.

If this plateau is hurdled, the DXY has the potential to trigger a very powerful advance into the 86 area initially and then towards 89-90. Such a powerful advance in the U.S. dollar could crush the commodity complex (CRB), which already is showing signs of stress as it breaks beneath its prior two significant pivot lows in the vicinity of 292-293 and is pointing next to 275-272.

Should such a scenario begin to accelerate in the upcoming hours/day, it will imbue investor psychology with intensifying deflationary perceptions -- despite all of the best efforts of the world's central bankers in general, and Chairman Bernanke in particular, who might be "forced" to unveil a fourth innovative way for the Fed to add liquidity to the markets in another attempt to create inflation.