Inflation Fears and a Dollar Solution

This AM I wrote that the Fed " is worried that commodity inflation (PPI) could eventually move the CPI." And this afternoon the beige book comes along. The FT sums up the report like this:

US manufacturers are finding it easier to pass on higher energy and other raw material costs to their customers, and companies are finding it harder to hire skilled workers, a Federal Reserve report said on Wednesday.

That is why the bond selling took off again in the afternoon.

Another interesting thought comes from Brad Setser:

Credit should be given where credit is due: one of the predictions of Dooley, Garber and Folkerts-Landau was that Latin America would join Asia in de facto pegging to the dollar. No Latin country has followed the example of Malaysia and China. But many now are intervening heavily to resist pressure on their currencies to appreciate. Countries like Brazil and Argentina, though, still have quite substantial external debts; they are a long ways from joining emerging Asia and becoming true net creditors to the world. But they equally clearly now prefer keeping their currencies a bit undervalued and building up reserves -- rather the opposite of the strategy Brazil pursued in the mid-90s, and Argentina pursued until the end of 2001. Latin America on its own, though, cannot come close to generating the flows required to sustain the enormous expected US current account deficit.

Every day around noon the headline "Brazilian central bank buys dollars" (I'm paraphrasing) hits the Dow Jones wire. As Brad says the Latin American economies are not big enough to sustain the U.S. current account deficit but on the margin it is news that seems to be a bit over looked right now. Could certainly be viewed as a marginal offset to Asian diversification. If you get some other dollar positive news, like falling U.S. gov't spending, it could turn the currency game a bit.

A bigger picture thought and not so important in the near term I would imagine.