The Dollar, Inflation and You

by Brad Zigler

Inflation in the euro zone ticked up to a higher-than-expected - and record-setting - 3.7% level in May, according to the screaming headline in today's Le Monde. The bad guys, natch, were oil and food prices.

With a target inflation rate of 2%, the European Central Bank has now sounded "the red alert," according to the French daily. A year ago, euro zone inflation was running at a comfortable 1.7% rate.  

Hmmm ... the U.S. May CPI rate was 4.2% (see "The CPI For Breakfast: Hmmm, mmm!"), up from 2.7% the year before. Yankee inflation rose 1.5% in a year; European prices increased 2%. And what's going on with the dollar?

The greenback has, in fact, been gaining some, er, purchase against the euro lately. Surprisingly, the buck - as measured by the U.S. Dollar Index (ICE: USDX) - is entrenched in a pretty strong uptrend. Some technicians are even pointing to a bit of short-term toppiness in the dollar, which has rallied from its March low of around 71 to probe the 74 area. The euro, meanwhile, has been drifting weakly downward, and now, say some, hints at becoming somewhat oversold.

This brings everybody to question the inner thoughts of European Central Bank honcho Jean-Claude Trichet who has relentlessly kept an anti-inflationary stance, holding the ECB's official refinancing rate at 4%. Bets are being taken now for a quarter-point rate hike to come out at the ECB's July meeting.

That might stem the capital tide toward the greenback and cheer the dollar bears, chief among them Peter Schiff, author of Crash Proof: How to Profit from the Coming Economic Collapse, who told Hard Assets Investor's own Mike Norman in April (see "Are We Doomed? Norman and Schiff Debate America's Future,") that the buck was headed for the dustbin when it "significantly broke through major support of the U.S. Dollar Index at around 80."

Schiff and Norman are going to have a chance to revisit this theme on June 24 when they square off for an interactive debate on Hard Assets Investor. Instead of the static format of February's Great Commodities Debate (Part I and Part II ), this "Clash of the Titans" will allow up to 100 online participants to interact with Peter and Mike, seminar-style, with a half-hour question-and-answer session following their tête-à-tête.

Norman really challenged Schiff on the fate of thee dollar and gold in their April two-parter, so this meeting ought to be a doozy.

Some of my favorite parts from their dollar repartee:

Norman:  If you look at the dollar against a broad basket of currencies that includes not only the euro or the yen, but also the Canadian, Mexican, Chinese, Singaporean, Taiwanese, Brazilian, Saudi Arabian and Russian currencies - a lot of the countries we do business with - the dollar has only come down modestly, maybe 25% in the last five years. However, since the early 1970s, the dollar has appreciated over 400% against those currencies. Don't you think it's an exaggeration to say that the dollar is "collapsing?"

Schiff: People are realizing they bought a bill of goods here. We're like Tom Sawyer and we've convinced the world to paint our fence. You know what? They don't want to paint our fence anymore. They have their own fences now and when they come to that realization, the dollar crashes. We're going to have to start living within our means again.

Good stuff.

First-come, first-served sign-ups for the webinar's interactive slots are being taken here. 

Comments

[Managing Editor]

Thanks for your comment. Agreed. The move to a specie-backed currency wought be a fractious event.

How would your new currency idea work?

[Hooligan1]

Yes, a new currency. We have been moving that way for years. It's called World Currency and guaranteed by your trusty United Nations.