Why the dollar rally could continue

The U.S. dollar has been getting stronger, but can the recent run-up in the greenback continue?

After a strong jobs report Friday morning, the U.S. dollar index moved up more than 1 percent. The dollar against a basket of six developed currencies reached its highest levels since June 2010.

But according to Boris Schlossberg, managing director at BK Asset Management, the dollar's run will have some challenges because of a detail in that very jobs report.

"I think it does continue to go higher," said Schlossberg of the dollar index. "But it is stalling a little bit here because it really needs support from the bond market. Despite all of the good numbers that we're having, the bonds are still not buying the recovery story. And I think the reason why is because the only number that was not good inside this report was the wage growth number."

For the month of September, wage growth remained virtually unchanged, according to the U.S. Bureau of Labor Statistics. That is important because Federal Reserve Chair Janet Yellen is closely monitoring wage growth to determine when the central bank should raise rates.

"The market is really waiting for wages to catch up with jobs," Schlossberg said. "Until that point, the dollar rally is going to go in fits and starts."

However, Todd Gordon, founder of TradingAnalysis.com, disagrees with Schlossberg. "I think we have a clear dollar breakout," he said. "I don't think it's a bond yield correlation story. I think if you look at the correlation for the last month, the dollar has a negative correlation with bond yields."

Instead, while acknowledging higher rates in the U.S. versus Europe, Gordon believes the dollar's strength is much more tied to weakness in the yen. "This has been a yen-selling story that is accompanying higher stocks," he said. "The yen carry trade is being put on. … That's what's driving this. I think dollar-yen is in fact leading."

But Schlossberg thinks Gordon's thesis is wrong. "The dollar-yen story is the weakest part of the dollar strength story right now," he said. "What's really been the story is the anti-euro/anti-pound story. What's happening is the U.S. is grossly outgrowing everybody else in the rest of the world. So capital is flowing to the dollar away from the euro and away from the pound."

To see the full debate on what's next for the U.S. dollar, with Gordon on the technicals and Schlossberg on the fundamentals, watch the "Street Signs" video above.

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