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Dollar could be on the verge of break out, as stocks get pounded

Piotr Powietrzynski | Photolibrary | Getty Images

As stocks spiral lower, strategists say the dollar may finally be ready to flex some muscle.

Concerns the Fed could tighten policy combined with worry about Argentina's default and sharp declines in Europe to drive U.S. stocks more than 1 percent lower Thursday. The market was on track for its worst monthly performance since January.

The dollar index, however, was trading close to its highest level in a year Thursday and is up 2.2 percent for the month of July, its best monthly performance in 17 months.

"This is what everybody's been waiting for," said Marc Chandler, chief currency strategist at Brown Brothers Harriman. "No matter what currency you look at, the dollar is trading at higher levels. The euro is falling because shorts are jumping in, and sterling is falling because longs are liquidating. What's driving this is the Federal Reserve is moving towards its mandate, which will allow it to raise rates next year."