I caught a lot of flack these past couple of weeks because I am calling for a dollar rally without giving too much of an explanation. I try every week to fit market forecasts on every major market and touch on a few special issues in a consolidated report. Sometimes I may have to leave a few details out to make it the quick read many of you have come to appreciate. In fact, let's skip the weekend review altogether this week and focus on what clearly appears to be the controlling force behind many of these commodity moves.

Why does the dollar matter?

The dollar dictates prices of many of the major commodities because they are priced globally in U.S. dollars, which means foreign buying costs are partially determined by their currency's relative strength against the dollar. A great example is gold since countries like India purchase significant quantities of gold each year. If the dollar rallies 10% against the rupee then gold could stay at the same price and it will feel like it is 10% more expensive to buyers from India. Why would anyone care about the Brazilian Real? Well considering they are the world's largest producer of coffee, monster ethanol consumers, major ag, oj and sugar exporters and have a volatile currency, it would make some sense that commodity prices would be tied to the Real's moves against the dollar. It is important to recognize that the price of commodities can be influenced by a plethora of fundamental components, but at the heart of all world trade is currency.

Fundamental Reasons for a Bull Dollar

The global climate can be summed up in one word: uncertainty. This uncertainty revolves around the central question of whether the world is coming out of recession or just taking a break after being supported by a massive global and U.S. stimulus. There are literally an infinite number of variables that influence market price movement in the U.S. dollar, but typically there is one overriding principle that pushes the market one way or the other. One day that principle reason may be the employment report, a Fed Meeting, a Presidential election, foreign policy changes, European economic conditions, and so on. The bottom line begs the question what is the underlying trend influence and how can you forecast it?

In the case of the dollar in foreseeable future, the main underlying influence is not the U.S. economy and not the European economy but rather how the two reflect upon each other. Have the actions by the U.S. government put the U.S. in the top spot for expedited economic recovery or have we set ourselves up for a complete and utter inflationary collapse? After all the bailout comes with the price tag of extensive money creation but in the end the market is likely to realize that the credit squeeze and change in credit practices far outs the government's efforts. Money supply is a measure of several factors, traditional and not so traditional. In the current economic climate just about anyone can see how hard it is to get credit these days. Interest rates may be low but money supply is weak, thus allowing for economic recovery without quite the hefty inflation penalty. So we get the catalyst of monetary infusion, the support of growing consumer confidence and investor sentiment, and we do it amid a European slow walk behind our pace. This means in the end the market will shift money where it is safest, and if the perception is the Fed made the right moves and inflation is contained, then the dollar will likely be very strong.

If this is the case one might ask why the dollar has declined in recent months and the answer is actually quite simple. Take a snapshot of the S&P500 index and compare it to the dollar - what do you see? The stock market rally, and a substantial one it has been, has traded inverse (opposite) to the dollar, thereby suggesting a potential near term top in the S&P will be a catalyst to a dollar rally.

James Mound is the head analyst for www.MoundReport.com, and author of the commodity book 7 Secrets. For a free email subscription to James Mound's Weekend Commodities Review and Trade of the Month, click here.