Interesting commentary today in the WSJ on the fate of the falling dollar and skyrocketing oil futures (dancing near $120) last week.  This Wednesday the Fed meets to chart the course for short term interest rates;  the money appears to be on one further quarter point rate in the overnight Federal funds lending rate to 2%, though speculation is mounting that will be it as attention focuses on the rising inflation potential. 

So what’s the tie to the falling dollar and oil?  Oil has doubled since late 2006, during this period of time the dollar has lost nearly 20% of it’s value against a broad array of currencies tracked by the Fed.  As everyone knows the euro has gained quite a bit during this period, and as oil is valued in dollars, as the dollar weakens it takes more dollars to purchase a barrel of oil, exerting upward pressure on prices. 

Pressures are mounting on the European Central Bank (ECB) to begin to cut interest rates - they haven’t thus far (pulling investment cash out of American instruments to higher yielding foreign instruments and adding to the dollar’s stress) - Italy’s exports are down, housing is troubled in Spain, Germany’s business economy is slowing, and global inflationary pressures have not avoided most of Europe.

The financial pundits speculate that ECB interest rate cuts, during a period when the Fed holds pat (after this probable upcoming cut), should strengthen the dollar, exert downward pressure to some degree on oil, drop prices on import goods, and in the longer run make it easier to control inflation here at home. 

This year will be a most interesting one on many different fronts…….

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