The rally in the U.S. dollar is back in force today, with the Dollar Index climbing to its highest level since early October. Given how far it has fallen since March, a rally up to its 50-day average—about 2 percent from here—is certainly a possibility. At first blush that doesn’t seem like all that much, but for currencies, such a move in a relatively short span of time is a big deal.

 

The inverse correlation between the dollar and stocks has been extremely high during the past year, so a rising dollar is frequently seen as bad news for equities as it sends the so-called carry trade to the sidelines. Regardless of the dollar’s moves in the coming weeks, the market is likely to trade in a relatively tight range. Technicians see the 1120 area on the S&P as stiff resistance where stocks will likely stall. Likewise, absent some external shock, downside risk in the near term is also likely to be rather muted. Looking on a somewhat longer time horizon, however, there’s ample reason for concern.

 

This morning we had a much worse-than-expected reading on producer prices, signaling that inflation could be back on the table sooner than most would like to admit. At the same time, we also had a surprisingly weak reading on the New York Empire Manufacturing Index of general business conditions.