What is about to happen with the U.S. dollar: will it continue its monstrous rally which it started last summer (with +25% gains in a matter of half a year) or is this a dead cat bounce?

As we know meantime, the dollar rally has created a strong deflationary pressure, impacting primarily all commodities, almost all currencies globally, several stock markets in the world, and Treasuries.

The dollar chart currently shows that it strongly bounced off its first Fibonacci support line. If that support holds, then king dollar will go much higher, creating potentially serious turmoil in several markets. Oil, for instance, should go much lower in such an environment.

The Trillion Dollar Question For InvestorsAnother standout feature on the chart above is that gold has been able to hold quite well in the context of the collapse of the oil price and the huge dollar rally. In January, gold did even go higher. That is evidence of strength in the gold market, at least so far.

Looking into the traditional relationship between crude oil and gold, on a very long term horizon, we see that oil was the first asset to rally when the secular oil / gold / commodities uptrend started, back in 1999. Gold broke out only 2 years later. See the green rectangle in the next chart.

Crude Oil Gold 1983

However, within the secular trend, it has been gold to react first, as evidenced by the two red rectangles.

The key question is whether gold is holding up as a sign that it will soon start trending higher, or that it is in a long term consolidation pattern. The way the dollar will react in the coming weeks and months will largely determine the answer to that question.