My last blog post The Inflation Tiger Rising concerned the rising tide of inflation in the BRICS countries – and the government efforts in China and Brazil to rein inflation in.

This post examines the other side of that coin – the impact of the US dollar on global prices and interest rates. A recent article by Tom Lauricella at The Wall Street Journal (see “Dollar’s Decline Speed Up, With Risks for the US” (April 23, 2011) chronicles the decline of the US dollar.

The US dollar as we all know is the international reserve currency.  Most international transactions, and much of the key international pricing – oil for example – is done in US dollars.

The US dollar has declined 1 percent in the past week against a basket of of currencies, repeating a similar drop of the week before.  In the past week the dollar as measured by the ICE US dollar index hit its lowest point since the lowest point of the index on March 16, 2008 – the Index fell to 70.698 (the Index had begun in 1973 after the demise of the Bretton Woods System of fixed rates at 100.).  Just before the 2008 global financial crisis the dollar had lost some 40 percent of its value against the basket of 6 currencies including the Pound, Euro, Canadian dollar and Japanese Yen.  This low point in 2008 represented a a steady decline of six-years of the dollar’s value.  As noted above, the Index is approaching that low once again.

The US dollar depreciation is a product of a low and continuing interest rate policy and the the growth differentials with the emerging market countries.  The rising price of oil is also a product of the depreciating dollar adding to inflation fears in the US.  The inflation impulse in the BRICS could add another element in the decline of the dollar as well, of course, the fears of the US deficit and debt and the fears that US politics will make reaching a sensible deficit strategy almost impossible.

The declining US dollar has led China officials to allow a steady appreciation of the renminbi in the last few weeks.  While US officials have urged a significant appreciation in the renminbi,  it leads Chinese officials to be less needful of purchasing US dollar debt with China’s now outsized $3 trillion exchange surplus.

The vicious as opposed virtuous cycles of exchange remain.