Adjustment

The dollar is declining yet again on participants acting on the future direction of interest rates as implied by the futures markets...and I will playfully throw in "Yen carry trade" to complicate matters on the cuasation of dollar depreciation.

Bernanke will have his hand firmly on the inflation expectations machine, and the price of oil is not helping the cause. I have said several times on this blog that HEADLINE inflation figures (which includes energy and commodity costs) are the Fed's new preferred mechansism for measuring inflation in this current market regime...and if that is the case, then a rate cut is not in the cards next week.

I also think that, in light of LIBOR rates, which have increased heavily due to it being the only viable financing vehicle for longer-term debt obligations and the now-frozen CDO/SIV/MBS markets, Bernanke might well refuse to move on rates at all. He must pay attention to rate differentials.

All that being said, I am watching U.S. fiscal position (i.e., the budget deficit) ever more closely at the moment, as this is the key to understanding dollar strength and money supply. The following article is an excellent essay on that subject:

http://www.hussmanfunds.com/wmc/wmc070910.htm