U.S. stock indices have been treading water all morning following an overnight rally that was prompted by greater demand for higher risk assets. The more the U.S. Dollar rallies, the greater the likelihood of a sizeable break in the stock market into the close.

June Treasury Bonds are posting a comeback after breaking near a 50% level at 116’04 earlier in the session. T-Bonds were down as investors shifted their interest toward higher risk assets. A strong move in the Dollar will signal a shift in risk sentiment which could drive Bonds even higher into the close.

The strengthening Dollar is helping to drive April Gold and June Crude Oil lower. Liquidation may be taking place in gold by traders who were looking for the demise of the Euro because of the Greek financial crisis.

The U.S. Dollar is mounting a strong rally at the mid-session as traders are backing away from higher risk assets. Comments from German Chancellor Angela Merkel may be the catalyst behind the weakness in the March Euro. Merkel said that a Greek bailout is not on the table and pointed toward the no bailout rule in the European Union agreement as the reason behind her comment.

Another reason for the developing weakness in the Euro could have been comments from Greek Prime Minister Papadreou who hinted that he’d be willing to turn toward the International Monetary Fund for help if the EU doesn’t come through with financial aid. His comments were most likely designed to light a fire under the EU to take action sooner.

Papadreou, in Washington to meet with the President and other government officials also wants the U.S. to investigate speculation in the Euro markets to look for signs of manipulation or excessive speculation. This action could prompt a rapid liquidation by hedge funds which would trigger a massive short-covering rally. The most recent CFTC Commitment of Traders Report showed a decline in the number of shorts. The actual number was still high, but the decline could be a sign that hedge funds are starting to pair positions.

Without any major U.S. economic releases until Thursday’s Weekly Initial Claims, commodity and equity markets will be subject to the movement in the Dollar. A stronger Greenback is likely to prompt selling in higher risk assets such as gold, crude oil and stock indices.

At the mid-session, the break in the Euro is pressuring the March Swiss Franc. Greater demand for lower risk assets is helping to boost the March Japanese Yen. The commodity sensitive March Canadian Dollar, March Australian Dollar and March New Zealand Dollar have weakened from their respective highs. The Aussie has erased all of its earlier gains while lower gold and crude oil is helping to weaken the March Canadian Dollar.