The September U.S. dollar index futures on Friday hit a fresh 3½-month high and were poised on Friday morning to post a bullish weekly high close. The dollar index has been grinding sideways to higher for several weeks. While the greenback bulls have gained a bit of fresh upside technical momentum this week, there is much heavy lifting to do to get the U.S. currency in a technical posture that would strongly suggest a major market low is in place and that prices can sustain a longer-term uptrend. One early yet significant technical clue that the dollar index has begun a longer-term price uptrend would be a solid push above technical resistance at the 75 level.

Any sustained rally in the U.S. dollar will almost certainly be a major bearish downward-driving force working against the crude oil futures market.

Much of the credit for the moonshot in crude oil futures prices this year has been given to the weakening value of the U.S. dollar vs. the other major world currencies. Speculators and hedgers worldwide have used their stronger currencies to purchase crude oil futures contracts on the New York Mercantile Exchange, which are priced in U.S. dollars. This trading play has created a vortex whereby higher crude oil prices beget a weaker dollar, which begets more buying of crude oil futures contracts. Importantly, U.S. government legislators and market regulators have taken keen notice of this phenomenon.

This week, the Commodity Futures Trading Commission -- the U.S. futures market watchdog -- requested that British regulators set limits on speculative trading of front-month West Texas Intermediate crude oil futures contracts on ICE Futures Europe. The CFTC has been under heavy pressure from the U.S. Congress to reduce speculation in the commodity markets, mainly due to record-high gasoline prices at the pump. The U.K.'s Financial Services Authority has agreed to notify the CFTC when speculative position levels reach similar levels to those set by the U.S. Nymex.

The ICE news comes amid ongoing calls from U.S. Congress members for less speculation in commodity futures markets. As long as crude oil prices are trading above $120 a barrel and pump gasoline prices are at $4 a gallon, the government is not going to ease up on finding a scapegoat for high energy prices.

Importantly, significant rules changes for trading markets are almost always bearish.

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Source: Futuresource and TradingEducation.com