Inflation: Consequence of Dollar Weakness

As the global economy begins its recovery (although there has been some back tracking in the European economy), the U.S. dollar is expected to fall in forex trading. Dollar weakness is an expected side effect of an improving economy, and that itself will lead to other issues. Indeed, GFT's Kathy Lien points out in FX360 that dollar weakness is likely to lead to inflation:

The biggest consequence of a weaker dollar is inflation. Commodity prices have been on a tear lately and that is a direct consequence of a weaker dollar. Producer and consumer prices are due for release this week and we expect inflation pressures to be on the rise. Tomorrow’s import price report will be the first clue on the degree of inflation over the past month. If commodity prices continue to rise, the threat of runaway inflation becomes more real.

With commodity prices often moving inversely to the U.S. dollar, it is no surprise that they are expected to make solid gains as the dollar falls into weakness in forex trading. When global economic growth picks up again, it is likely that inflation will follow.