The dollar is back up in dangerous territory for emerging markets

The DXY, more familiarly known as the “dollar index,” is up 3% since the month began. That may not look like a huge move, but given the longer-term trend and the recent past, it’s enough to give emerging market traders pause.

After cracking the 80-point barrier on Thursday, the DXY is now cresting to its highest levels since mid-January.

But Tuesday’s rally was possibly the most significant for world markets. DXY briefly touched above 81.25, blowing away every resistance line stretching back to December, when the euro looked like it was coming apart and the flight to safety bid to the dollar was alive and well.

With the headlines coming out of Greece and even France now looking more ominous than it did last year, it’s no wonder the safe haven bid is alive again and the dollar is pushing back upward.

Watch 81.78 — just 0.6% up from here — as the last near-term resistance. If it breaks, we go all the way back to August 2010, when Greece was just starting its cycle of confessions, bailouts and public backlash.

Back then, global sentiment was a lot less fragile. It feels like a different world.

Going back there now exposes DXY all the way to 88 and could cause significant damage in all “risk” asset classes in the meantime.

The move that climaxed in January started to drag on commodity markets (DBC, quote) about six weeks later.

We’re now two weeks into the latest move to the upside for DXY and the commodities — much less emerging stock markets and currencies — have yet to recover.

Strap in and keep an eye on the dollar. Remember, you can always play its movements via the leveraged dollar long (UUP, quote) and dollar short (UDN, quote) funds. UUP is negatively correlated to “risk on” assets we tend to talk about here at Emerging Money, so any new leap in that fund will tend to coincide with a move down elsewhere.

That’s probably the way to hedge downside in this environment. On the other side of the trade, UDN tends to move alongside all the stocks, currencies and commodities you know and love — wouldn’t you rather trade them to the upside instead?