Long-time readers know that I've begun to develop a love/hate relationship with the US Dollar. On one hand I believe the US currency is horribly flawed given our unserviceable debt load and the Fed's profligate spending.

However, on the other hand, to make money investing you have to be willing to go against the crowd. And with less than 3% of investors currently bullish on the US Dollar, the contrarian in me can't help but wonder if we have the makings of a serious Dollar rally similar to the one that kicked off the 2008 Crash in stocks.

Thanks to Ben Bernanke and pals, the US Dollar has essentially become THE carry trade for the entire world. If you're unfamiliar with "carry trades" these are investment strategies in which you borrow in one currency (usually one with very low interest rates like the Dollar today) and invest in another currency or investment class of higher returns. Provided the second investment returns substantially more than interest rate on the currency you're borrowing in, this can be a highly profitable strategy.

With interest rates at 0.25% or so today, the US Dollar has become the carry trade of choice, with investors all over the world borrowing in Dollars and investing in stocks, gold, oil, virtually any investment class you can name. The end result is that the Dollar has begun to trade at a near perfect inverse relationship to pretty much everything out there:

Carry trades work fine until the currency you borrow in rallies (or suddenly interest rates go up). When this happens the profit margin disappears the trade often reverses as investors sell the second investment in order to pay back the money they borrowed.

Which may be happening for the US Dollar right now. Last week, the Dollar rallied strongly as stocks, commodities (everything but gold), collapsed.  The question now is whether this was the start of a genuine Dollar rally or simply a brief head-fake before the US currency rolls over to test 72: its 30-year low.

From a technical standpoint, the Dollar failed to break its 50-ema. Until this happens, the US currency remains in a downtrend. 

However, it's worth noting that the Dollar held its ground at 76 and change. Previously, 76 was a point of downward resistance. The fact that the Dollar rallied ABOVE this level and held it IS a sign of increased strength. If the US Dollar HOLDS here we may in fact be seeing the first signs of a rally in the US Dollar. If this happens, expect to see stocks and commodities (with perhaps the exception of Gold) completely collapse in a repeat of the second half of 2008.

Long-term I believe the US Dollar is a horribly flawed currency. The US has absolutely no way of paying back the debts it owes. And we've now spent more money battling the Financial Crisis than we did in WWI, WWII, and the New Deal combined.

However, with so much of the investor world betting on a Dollar collapse, the stage is set for a MAJOR surprise here. Even a brief bounce in the Dollar could become a full-fledged rally as shorts and other investors who are borrowing in Dollars rush to cover their shorts (buy Dollars).  

Keep your eyes on the most-hated currency in the world. It could be flashing a signal that stocks are due to collapse.