The markets were full of contradictions last week. Take for example the turmoil in the Middle East. In past crises, investors flocked to the U.S. dollar. But not this time. The U.S. dollar futures contract fell to 76.41 last week.

Another contradiction: the U.S. jobs report was the best in two years, with 192,000 new jobs added. The stock market should have rallied strongly. Instead the Dow fell 88 points. The crises in Libya and elsewhere overshadowed the favorable jobs picture.

The U.S. dollar is coming under increasing pressure on several fronts. First and foremost is oil. Oil closed at $102 per barrel Wednesday for the first time in over two years. Oil has been driven upwards by the turmoil in the Middle East. The Libyan situation is getting worse with both sides vowing to fight on. There is unrest throughout the Arab region. The great fear for the West is that oil flows may be disrupted. The U.S. dollar usually moves inversely to oil. Today the March futures closed at 76.689, down .394

The beleaguered U.S. dollar, which has weakened about 50% versus the euro and about 11% versus the British pound since 2002, is down but hardly out.

The dollar has rallied in the past two months versus the euro (up 8%) and pound (up about 4%), on renewed concern about sovereign debt in Europe. This time, the concern is about Portugal's debt, and the impact continued credit market woes would have on both euro-zone and United Kingdom GDP growth.

On Tuesday, Portugal's Prime Minister Jose Socrates said his country will not need a bail-out, and its budget deficit will be lower than forecast, Bloomberg News reported. He said rumors that the country needs aid are helping "speculators" while hurting Portugal and driving down the euro.

The U.S. dollar staged dramatic back-to-back rallies on Wednesday and Thursday of this week. As the outlook for the U.S. economy continues to improve, money is flowing back into the dollar. A rising dollar has generally been bearish for stocks and commodities, so traders with significant exposure to risk assets may want to lighten up and take profits.

One place to consider putting some cash in the near-term is the PowerShares DB US Dollar Index Bullish ETF (UUP), which tracks the performance of the greenback versus a basket of foreign currencies. As has been the case with most of the pullbacks that have occurred in 2010, the likely next downside catalyst for global risk assets is another re-flaring of the sovereign debt crisis in Europe.

Three intermarket commodities are on the move today. The Financial Times reported that the U.S. dollar hit a low against the Swiss franc.

Why is this noteworthy? First the Swiss franc is a separate currency, not part of the euro. With Europe in disarray, the only safe currency is the Swiss franc. Anyone wanting to hedge against the eurozone getting worse would buy the Swiss franc. On the futures market, the March Swiss is trading at 1.05610, up 0.0138 (9:20 EDT). The March U.S. dollar is trading at 80.18, down 0.49.

The eurozone debt crisis is spreading across Europe. The latest Irish bailout is not quelling the fear factor. Now, all eyes are turned to Spain, Portugal and Italy.

What has happened is that banking systems are freezing up, the Financial Times explains. One Spanish banker told the paper, "The bond and credit markets are completely closed."

Euro Currency Trust (FXE) closed down 0.6% to 131.93 , near its 100-day moving average of 132.47. Overall option implied volatility of 13 is near its 26-week month average according to Track Data, suggesting non-directional price movement.

CurrencyShares Japanese Yen Trust (FXY) closed down 0.62% to $117.68. The FXY reflects the price of Japanese Yen plus accrued interest. FXY over all option implied volatility of 11 is near its 26-week average according to Track Data, suggesting non-directional price movement.

Options Update is by Stock Specialist Paul Foster of theflyonthewall.com.

The recent sell-off in risk assets can be largely attributed to the strength in the U.S. dollar. While on a longer term basis the general decline in the greenback may make fundamental sense, on a near term basis, the currency looks to be oversold and could continue to rally for weeks or months. This is particularly true when considering the precarious nature of the European sovereign debt situation.

It was not that long ago that many observers and investors were calling for the euro to hit parity with the greenback. The recent Irish problems suggest that this kind of talk may get started once again and a substantial decline in the euro seems like a possibility. This is a bullish indication for the dollar.