To get at inflation directly, I think it is necessary to point out the U.S. trade deficit.  As the U.S. continues to print money and buy more good than it exports, the attractiveness of the USD abroad is dwindling.  When foreign countries receive seemingly endless Dollars for their exports, our trade imbalance grows larger and larger, thus driving the value of the Dollar down further and further.  As the value of the Dollar falls, domestic as well as imported goods and services cost more as inflation rises.  This can be linked to the price in oil because if the value of the Dollar drops, oil producing countries such as Saudi Arabia raise the nominal price of crude because the dollars they are receiving for payment are worth less and less in the global market.  Some experts propose that crude oil should be traded with Euros instead of U.S. Dollars, and if that would happen, the USD would surely see steep price depreciation as oil-hungry countries could sell their USD for Euros.

Wrap-Up

Commodities are king these days, even after oil has plummeted from its record $147 per barrel price over the summer and gold prices have moderated some.  And with the global credit crisis and recession-like conditions in many countries, a lot of the world’s currencies will be trading under pressure and intense scrutiny as central banks across the world continue to meet and make decisions on the future.

This four part series about the forex market is a collaboration between myself and colleague Steve Murray. Look for part two of this series this weekend, which will focus on the recent flight to quality of U.S. treasuries ad how the new TARP program will effect the currency in the coming months.

- Chris Barrella

Disclosure: None