The question that puzzles me is "Why isn't the USD rallying" and also "Why is the Euro levitating?".
About the Euro, I think it can be attributed to the "HOPE strategy" which consists of buying risky assets while hoping/wishing that the central bank will save you. I don't see any other possibility here.
Our Anonymous friend has made a few points on Tiho's post (above), which are valid, but I think there's much more to it.
1. The fact that treasuries have had such a massive rally, with the dollar staying so low is also interesting. Because foreign investors need to buy USD before they can buy US treasuries, right? There has been quite a lot of money pouring into the treasuries, and yet, the USD is at rock bottom.
2. While the equity have been correction — they are still way too high, and there's still too much bullishness in the equities markets in my opinion — commodities have failed to fall meaningfully, some still making all time highs, gold being close to $2,000 and the highly speculative is still at above $42. These show that speculative mania is still unabated.
3. The real estate bubble has popped in Australia, and speculators, commentators, strategists have been in complete denial about this. When the Central Bank is forced to cut interest rates to close to zero to try to save the banks — try to, not manage to — the AUD will collapse (aim at least 30% drop before the bottom, and that's the optimistic forecast. The pessimistic one will be a 50% drop).
4. Finally, people have been piling into the JPY and the CHF, and when the price action reverses — we have extreme bullishness on both of these currencies —these trades will have to be unwound which will create a massive USD rally, which in turn should create a major leg down in risky assets.
The bottom line and short summary here, is that while many think that the fact that the USD has started a rebound is a bullish sign. And you'd have understood that to me, it's actually the exact opposite: the fact that the equity markets have managed to drop significantly without a USD rally is a very bad omen. And the next leg down will probably be occurring with the USD rising while at the same time the RISK OFF trade is on, which will decimate not only equities, but also commodities.
The current set up will be deadly, and will be available somewhere near you, very soon.
Full disclosure: I have been short the EUR/USD since 1.48 and short the AUD/USD since 1.08. I just opened new short positions on the AUD/USD at 1.07 — so as you can see, I put my money where my mouth is.