As anticipated, the European Central Bank today raised interest rates by .25% to fight inflation. Ironically, since the Dollar consequently fell against the Euro, this move may stoke the fires of inflation here in the United States. How? If the Dollar is weaker against the Euro because of the difference in interest rates, then dollar-denominated commodities like crude oil are likely to rise in price, thus fueling the fires of inflation. (For example, soybean prices also hit a fresh all-time high price overnight.) If the ECB continues on its path to raise interest rates even more in future months, the Fed may be forced to do the same to stem the fall of the Dollar and prevent the price of crude oil and other commodities from fanning inflation even more. This must be the Fed and Chairman Bernanke's worst nightmare!The Dollar fell to a two-month low overnight (see chart).
