Deepening weakness in the dollar is heightening talk that policy makers are pursuing a deliberate, thinly masked devaluation policy to raise inflation in a move to monetize the government's debt. This talk has been going on all year in the commodities markets but is now appearing in broader research including today from Morgan Stanley which says there is "the possibility that central banks might want to engineer controlled inflation to reduce the public debt burden." Until an exit strategy is announced, traders are saying that foreign investors will seek to protect themselves with non-dollar assets and that the markets will taunt the Fed by selling dollars and buying commodities.
The dollar index fell a steep 0.7 percent to 74.99 with the dollar testing the key $1.5000 level against the euro, a break of which may, according to traders, trigger intervention from the ECB. Oil hit new 2009 highs, rising $1-1/2 to end at $81 with copper and zinc also hitting 2009 highs. Gold led commodity gains earlier in the month and, pressured by profit-taking, was unable to make much ground, ending only $5 higher at $1,060. Earnings news was mixed, headed by a huge loss at Boeing which continues to suffer from costs associated with prior production delays. Charles Schwab, citing the drag from the dollar, is recommending that U.S. investors seek companies in sectors with broad international exposure including technology, materials, industrials, and energy. The S&P fell 0.9 percent to 1,081.