The dollar has been falling on and off for nearly 10 years, and it's in big trouble right now. The commodity inflation, housing bubble and oil shock of recent years all can be traced to dollar weakness and excess money-creation by the Fed. A weak dollar helped destroy the Bush Boom and create the Great Recession. But now people are talking about ending the dollar's reserve-currency status.
According to London's Independent, the Arab oil producers in the Gulf are planning with China, Russia, Japan and France to end dollar transactions for oil and move instead to a basket of currencies that might include the Japanese yen, the Chinese yuan and the euro, along with gold and some kind of regional Gulf-state currency.
I say, where there's smoke there's fire. The dollar-demise story just won't go away, and it's clear now that China and others have lost confidence in the greenback. For the U.S., this is mostly a self-inflicted wound. And the Treasury and the Fed are in denial about it. The gold price has jumped all the way to $1,050, while the dollar index has fallen again. Without question, the U.S. is creating too many dollars through the Fed, and fiscal disarray continues to threaten more of the same.
And here's a real conflict brewing in the financial markets: The Fed is fighting deflation with a near-zero interest-rate target, while gold, the dollar and commodity markets are signaling that inflation is the real problem. Somebody is going to be very right here, and somebody is going to be very wrong. I'm betting on the markets being right.