Fallon Financial Commentary: Can the dollar save the day? Get the latest market commentary and stock trading ideas from Declan Fallon

With global economies and their currencies on the retreat now is the time for the recovery of the much maligned dollar. The relationship between gold prices and the dollar have reached extremes, but with inflation less of an issue in a slowing economy we should see some rotation out of gold and into the dollar.

If true then the bear trap and bounce in gold will stumble on its next test of $1,000 and rollover as part of a cyclical bear market, while the dollar mounts a challenge of 2006 highs as part of its cyclical bull market.

The relationship between the S&P and the dollar is not so smooth. While the sharp advance in the S&P:dollar ratio has set this indicator on its way towards a bottom, it is well off the ratio which marked the 2002 bottom. Although I favour a decent Santa rally this year my expectation for a tough 2009 would look to be borne out by this relationship; perhaps we are in for a repeat of the 2001/02 collapse. Part of me thinks the nature of this year's capitulation should hold on a retest, but I suppose many would have thought the same of the post-September 11th collapse.

As for the dollar itself; it worked nicely off the ROC low but has now encountered some stiff technical resistance along with reaction lows in the 82-84 range from 2006. The long term declining trendline is history and a retracement into the Fibonacci area will likely coincide with a backtest of this line. This move down will be a false hope for shorts as the past reaction high in late 2007 was cleared relatively easily and 76 should hold as a reaction low.