Federal Reserve policies have put the US dollar the risk of crashing, which will hammer consumers through higher prices, strategist Axel Merk told CNBC.
Investors should brace for a much weaker dollar by diversifying out of the greenback and into currencies of other countries, said Merk, chairman and chief investment officer of Merk Investments, of Portland, Maine.
Merk spoke the day after the Fed said it will be embarking on a program to buy $600 billion in Treasurys in an effort to pump up the economy by increasing liquidity. Critics say the program, also known as quantitative easing, will further devalue the dollar and ultimately create inflation.
"It's with the best of intentions but I think it's a very, very wrong policy," Merk said in an interview.
Consumers should prepare for another turn of events like the spring of 2008, when oil prices soared to $147 a barrel and gas at the pump was more than $4 a gallon, he said.
"One of the key things here is a weaker dollar has traditionally not been inflationary because Asian exporters like to absorb the higher cost of doing business," Merk said. "There comes a breaking point when Asian exporters can no longer absorb that higher cost of doing business. They'll raise prices and guess what? They will stick.
"So we will have a cost-push inflation. We're going to get inflation but not where Bernanke wants to have it. We're not going to get wages to go up. We'll get the price at the gas pump to go up instead."
The current climate of low inflation has spurred comparisons to Japan's "lost decade" where deflation prevailed.
But Merk said the difference in monetary policy between the two countries will guarantee different outcomes.
"We won't be like Japan because we finance our deficits externally. So our fate will be different," he said. "We'll have a dollar that may crash in that process. The issue here is that (Fed Chairman Ben) Bernanke wants to have a weaker dollar. This is the first Fed chairman who is seeking to have a dialogue about the dollar."
Merk said forex investors still can navigate a difficult environment but need to be diversified and should focus on countries that will be looking to clamp down on inflation by boosting rates and backing their currencies.
"There's no such thing anymore as a safe asset. Cash is no longer safe," he said. "Do what central banks do, they diversify to baskets of currencies. That's what we try to do. It's a pity for any savers out there, but we'll survive. We'll get through this."
