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Risk Aversion and the Dollar Now

The closing of the European market at 11:30am ET has stabilized the euro and taken U.S. stocks off their lows.

Are traders getting hurt by the strength in the dollar? While many traders were short the dollar for months, the Commitment of Traders report indicate that while market speculators are still short, they are not nearly as short as they were a few months ago.

The underlying story is familiar: risk aversion benefits the dollar. The dollar's strength in the past few weeks could not come at a better time for the Federal Reserve or for Ben Bernanke. The weaker the dollar gets, the more political problems occur (domestically and internationally), the more likely rampant inflation will occur, and — worst case — the loss of the dollar standard in the world.

But there is a serious downside to stocks from all this turmoil: the increased attention given to Ireland may be a catalyst for traders to close their books early — I mean investment funds or hedge funds who have modest profits on the year. Remember, most funds were under water on Labor Day — a late year rally has saved them, and many are doubtful there will be a significant rebound going into the end of the year.

Second Opinion:

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