After reaching a 15 month low early in the week, the U.S. Dollar closed higher for the week against a trade-weighted basket of currencies. Technically, this closing price reversal, once confirmed, often leads to a 2 to 3 week retracement. The daily chart suggests that a move through 77.50 is necessary to turn the main trend to up.

The low for the week for the Dollar was posted shortly after Fed Chairman Bernanke mentioned his concern for the Dollar in a speech. Although he never said the Dollar was too weak, he did say that the Fed would monitor its value to make sure that it did not interfere with its mandate to shore up employment and maintain price stability.

At first this statement seemed like the similar lip-service the Treasury usually produces when asked about the Dollar. Traders definitely reacted this way when they sent the Dollar lower and stocks higher. The next day, however, European Central Bank President Trichet stated he agreed with Bernanke then proceeded to talk up the Dollar. In my opinion, it was the statement by Trichet which had the most impact on the Dollar as it put an end to the rally in the Euro.

Also this week, President Obama asked the Chinese government to adjust the price of the Yuan to help make the Dollar more competitive. This was met by a stern response by Chinese officials who called for the U.S. to get its own house in order first. Last week, the Chinese government announced that it was willing to change the methodology it uses to value the Yuan. Global pressure is most likely to force them to follow-through with their plan. This news helped slow down the pace of the Dollar’s decline this week, and may have been a contributing factor to this week’s rally.

The recent barrage of negative reports about the Dollar’s demise may have enticed trend traders to overload the Dollar on the short-side. If a trap was set and an excessive amount of shorts bit on the Bernanke comment, then the Dollar is set up for a huge short squeeze. This week’s closing price reversal could be the first sign that a massive short-covering rally is just starting.

This week, traders left higher risk assets in droves. This was especially evident in the equity markets by the closing price reversal tops in both the S&P 500 and NASDAQ. An early end of the year liquidation could be taking place in equities which could add additional upside pressure on the Dollar during the holiday shortened week coming up.

Gold traders don’t believe the Dollar will rally as this market closed near the high for the week. If they do believe then they are disguising it well. This is why traders should be careful about going aggressively long the Dollar. The Dollar will not rally much without some indication that gold traders are willing to cut back on their buying activity.