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Dollar, oil prices hint of inflation

Rising energy costs and the declining dollar pose trouble.

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Two runaway trends – record oil prices and a plunging dollar – are hitting consumers just in time for the biggest retail spending season of the year.

Americans will be paying more at the gas pump and in their home-heating bills. Meanwhile, a falling dollar means that imported goods are more expensive. That includes all the toys, gadgets, and clothing people buy during the holiday shopping season.

The dollar is down for several reasons, but all reflect a more negative view of the United States relative to the rest of the global economy. Investors are selling greenbacks because of concern that inflation will rebound, uncertainty about the health of US banks, and a higher risk of recession – plus some longer-term rethinking about where to hold currency reserves.

What's going on with oil is partly the flip side of that same financial coin. Since oil is priced globally in dollars, it's typical for any big markdown in the dollar to be mirrored in a big markup in oil prices. For foreign buyers, that keeps the price of oil fairly stable. But US consumers take that adjustment on the chin.

"The terms of trade have worsened" for Americans, says Ken Mayland, who heads ClearView Economics, a Cleveland research firm. "The amount that the dollars in our pocket can buy has diminished."

A key question is whether the dollar's decline, in the long term, will be a healthy thing.

Some economists say that an overvalued dollar in recent years has made the global economy imbalanced – and that some retrenchment by US consumers is the price to pay for a return to normal.

Others say that the dollar's recent drop – and the record highs set almost daily by the rival euro – is the marketplace's warning signal that the Federal Reserve is failing to keep inflation pressures at bay. An inflating currency is generally a declining currency.

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