Feel mush,push

In sword fighting, it is said, when you feel mush, push; when you feel steel, retreat. The dollar feels like mush and the market is pushing. While technical indicators and short term speculative positioning are at extreme levels (warning that a technical correction may be in the offing) the dollar bears will remain in control until the official pain threshold is reached.

Support for the euro is seen ahead of $1.2750. Many investment banks have revised down their dollar forecasts based on the recent price action; many are now looking for a test of the $1.30 level in the euro. As more observers recognize the U.S. has abandoned the strong-dollar policy in everything but the exact words, the risk is the euro will test its record high near $1.3660 this year.

The dollar also faces important resistance near 112.00 yen and while 109.00 may now offer support, the real downside objective is closer to 105-106.

The dollar’s depreciation is tantamount to a partial default. The risk is officials will find it increasingly difficult to arrest the greenback’s decline as this becomes more evident.

In a world of fiat currencies, confidence in officials is a critical factor. Confidence in the U.S. Administration is on shaky ground at best at the moment and it does not seem to realize it.

The combination of low volatility, low interest rates in advanced industrial countries, plenty of global liquidity, and rising commodity markets has fueled a multi-year rally in many emerging markets. These conditions have changed. The risk is for a larger unwinding of emerging market investments. Investors in the emerging markets could be among those burned when old men play with fire.