We got confirmation of sorts late on Friday per the COT report that the sharp dollar rally beginning during the first week in August was indeed, apparently mostly short covering ahead of the FOMC. And I have no doubt we’re getting more of it this morning, as well.

As of last Tuesday (the day before Wednesday's FOMC), the COT report revealed late on Friday that specs had broadly cut their net short positions in the dollar by just over a third during the recent 3-day rally that had occurred off the dollar index’s low for the year on August 5. In all likelihood, that short position has been even further reduced since then.

Now, obviously the OTC currency market is much bigger than the futures market -- which is where this COT report comes from -- but more than likely, the futures are fairly representative of the OTC market as well.

As a result, it’s another reason to believe that the recent bounce in the dollar is going to fail, just as the relative strength in gold and commodity prices during the dollar's recent rally had been telling us -- even before we got this datapoint.

Speaking of which, note that even as the US dollar Index has traded back up to its July 29 high, just shy of the 80 level this morning, based on the usual knee-jerk “sell equities = buy dollars trade” gold, silver, crude oil, and the CCI equal-weighted commodity index are nowhere near their lows of July 29.

Given the large number of dollar bulls/dollar deflationists that have already come out of the woodwork in the last 2 weeks to embrace the dollar’s rally off its low as the beginning of some sort of repeat of 2008's dollar squeeze, a renewed sell-off in the US peso (and the likely corresponding rally in gold) could be rather violent, too.