A Weak Dollar Feeds Inflation

Falling dollar fuels inflation fears in U.S. government bond
market
By Deborah Finestone Bloomberg News
Published: November 14, 2007
.. . .
A weakening dollar feeds inflation by driving up prices for
imported goods, especially commodities used to hedge against
currency losses.

Oil has risen 61 percent this year, touching a record $98.62
a barrel this month. Gold has increased 31 percent to $848
an ounce in New York. Platinum, used for jewelry and
catalytic converters, climbed 25 percent and reached
$1,498.80 an ounce.

Economists surveyed by Bloomberg were expecting the
government to say Thursday that consumer prices climbed 3.5
percent in October from a year earlier, the most since
August 2006.

Inflation typically accelerates 21 months after the dollar
starts depreciating, according Mustafa Chowdhury, head of
U.S. interest rate research in New York at Deutsche Bank. A
"substantial" increase in consumer prices in 2009 is
possible because of the dollar's slide, he said.

Growing concern over inflation, which erodes the value of
fixed-interest payments, may limit the biggest rally in U.S.
government securities since 2002. Returns for Treasury
securities have already more than doubled the 3.1 percent
they tallied last year, according to Merrill index data.

"Inflation-adjusted bonds are the premier place to be," said
Seth Plunkett, a fund manager at American Century
Investments in Mountain View, California.

The Fed's ability to fight price increases has been
compromised this year by falling home sales, rising mortgage
delinquencies and contaminated credit markets that forced
the world's biggest banks to record more than $45 billion in
write-downs and losses.

Rather than raise its target rate for overnight loans
between banks, policy makers cut borrowing costs twice in
the past two months, to 4.5 percent from 5.25 percent, in
order to keep the economy from falling into recession. Lower
rates gave traders more reasons to sell the dollar, spurring
inflation.

The outlook for prices is "subject to important upside
risks" from crude oil, commodities and the weaker dollar,
the Fed chairman, Ben Bernanke, said in testimony last week
to the Joint Economic Committee of Congress. "These factors
were likely to increase overall inflation in the short run
and, should inflation expectations become unmoored, had the
potential to boost inflation in the longer run as well."

http://www.iht.com/articles/2007/11/13/bloomberg/bxatm.php


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