Inflation and the Dollar

4

There are growing doubts about the official CPI numbers in the US. Oil and food prices are going up in the markets, but aren’t seen in CPI. If inflation will indeed rise, how will this affect the dollar? Here are some thoughts of a scary scenario.

The well known investor Jim Rogers says that the government’s inflation data is a sham. Here’s a quote from the Telegraph:

“Everybody in this room knows prices are going up for everything,” Mr Rogers told the Reuters Summit.

Rogers expects commodity prices to rise, US bonds to plunge and gold to reach $2000. While many doubt these predictions, the price of food in the US is rising slowly.

I had the honor to speak with Gonzalo Lira who sees hyperinflation coming to America, starting in the spring. While Americans will accept higher prices during the cold winter, prices won’t come down so easily in the spring, and that’s when the cycle will begin according to Lira.

And how will this affect the dollar?

The initial reaction to higher inflation signs will be positive for the dollar. Why?

  • Interest rates: Higher inflation means raising interest rates, as Rogers predicts.
  • Economic recovery: It will also be seen as a sign that the US economy is recovering, getting out of deflation and enjoying a stronger, more stimulated economy.
  • Higher yields: Higher commodity prices will diversify money away from bonds. Lower bonds mean higher yields, and this will also strengthen the US dollar. In recent days, higher US yields have pushed the dollar higher, especially against the Japanese yen, but also against other currencies.

But what will happen in the long run? Inflation or hyperinflation is a very messy thing that will eventually devalue the currency. So, if this scenario indeed happens, and people realize that it is out of control, the dollar will devalue.

What do you think?

Get the 5 most predictable currency pairs

About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

4 Comments

  1. Pingback: Natural gas prices continue to rise while Gold and Silver flop – news update for December 8th | Trading Energy

  2. Ali Kazim Oz on

    I do not think so that USD will slump during a big inflationist area, so US inflations means WORLD inflaiton, and it comes us two way, one of is a new criss because of rising rates all around the world, or just US rate rising, both of them is good for USD. For the gold, it came here for this ”Big Inflation coming” expectation, so as you know if expectation is OK, it is time to SELL gold…

  3. Pingback: NY Natural gas prices exploding towards 9$ | Silver prices substantial fall – Daily recap | Trading Energy

  4. Pingback: FOMC Preview – Will Inflation Be Mentioned? | Forex Crunch