LONDON: The fate of the dollar will be pivotal for global financial markets this week as the world's two most powerful central banks battle the commodity-driven inflation that has been spurred by the dollar's long slide.
The dollar has been left on a knife-edge after a week in which the Federal Reserve and the European Central Bank appeared to compete for the prize of the toughest inflation fighter.
As a stream of global economic data sent conflicting signals on rising inflation and slowing growth, the outlook for all financial markets has rarely been hazier.
"Concerns about inflation have increased considerably among all central banks," said Dale Thomas, head of currency management at Insight Investment in Britain. Both the Fed and the ECB, he said, "have signaled they will have tighter monetary policy than people had expected."
Thomas said the desire to have a strong dollar was undermined by the fact that apart from the United States, the rest of the world is tightening policy.
The United States "wants all things without taking pain," he said.
This is the main argument for rate hikes. Bernanke's massive rate cuts are a gamble based on the slowing economy unhinging inflation. But if he is wrong, he would have gone all in too early. Friday's CPI will get a lot of attention. Since the week after that we have quadruple witching and PPI, I would not be surprised to see the VIX move back up to the upper-20's.
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