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Investors fixate on inflation data Add to ...

Here's Allan Robinson's At The Bell which you'll find in Thursday's newspaper: The currency and bond markets have been in turmoil this week as investors try to get a grip on the U.S. dollar, interest rate policies and inflation in the midst of the U.S. credit crunch. HOW WILL MARKETS REACT? The focus today will be on soaring import prices and tomorrow it's the critical consumer price index, both key factors behind Federal Reserve Board chairman Ben Bernanke's worries about inflation appearing to supersede the mortgage crisis and the slowing economy. U.S. import prices on a year-over-year basis are forecast to be up 17.2 per cent in May, compared with 15.4 per cent in April, according to a survey of economists by Bloomberg. Import prices increased 2.5 per cent during May, compared with 1.8 per cent in April. The culprits to the soaring inflation pressures are oil, natural gas and food along with the weak U.S. dollar. The Fed, the U.S. Treasury and President George W. Bush have all weighed in on the dollar's weakness during the past few days, leading to speculation that the government might intervene in the foreign exchange markets to prop up the greenback. "We shall go out upon a limb here and suggest that this means that the administration is considering intervention in support of the dollar as a signal to the market that it does indeed 'mean business' in this regard," said Dennis Gartman, editor of the Gartman Letter LC. If the U.S. Treasury does intervene in the currency market, the government should also sell oil from the Strategic Petroleum Reserve at the same time, he said. Real support for the U.S. dollar would only come from a hike in the federal funds rate, but Mr. Gartman and others think that is still months away. "We have moved up the yield on two-year U.S. Treasuries 50 basis points in just 48 hours," said Andrew Busch, a global foreign exchange strategist with BMO Nesbitt Burns Inc. "I think the rate market has gone too far in anticipating Fed rate hikes down the road - how many and how quickly," he said. The futures market is already betting on a rate hike in September. (A basis point is 1/100th of a percentage point.) "It's a stagflation dilemma, but I can't recall a time when the Fed raised rates when gross domestic product growth was less than 1 per cent and the unemployment rate was climbing," Mr. Busch said.

 

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