The bond market as yet is unmoved by the current round of inflation talk, but the dollar and its arch nemesis, gold, are sensitive to the chatter.

Yesterday was a potent reminder of the sensitivity that permeates the world of money, fiat and real, when the inflation monster is invoked, or gently reviewed. Indeed, the greenback suffered its biggest daily decline against the euro in three years, notes Ashraf Laidi, a forex strategist at MG Financial Group. The U.S. Dollar Index took it on the chin as well, reversing several weeks of increases with a sharp drop yesterday.
For the casual observer, the selloff in the buck might appear odd, given that it was the European Central Bank that yesterday felt uncompelled to fight inflation with stronger medicine. As such, the ECB left its benchmark interest rate unchanged at 2.0%, a level that’s prevailed since June 2003. By contrast, the Fed has been busy burnishing its inflation-fighting credentials of late by raising interest rates consistently for more than a year, albeit in baby bites of 25 basis points at a time.
All things being equal, relatively higher interest rates tend to support a currency. But all things are not equal, nor does equality in matters financial and economic look set to pay a visit any time soon, if ever. Taking a stab at the always thankless task of explaining Mr. Market’s behavior, one observer put it this way: “The higher rate theme [in the U.S.] is offset by fears that inflation may move higher and growth may move lower,” Gavin Friend, currency strategist at Commerzbank in London, told Reuters today.
The gold market could hardly agree more, given that the price of the precious metal, jumping nearly $6 an ounce yesterday to $475, puts the commodity near a 17-year high. In today’s session, the metal added more ground, closing up $2.90 to $477.90.
But in the spirit of the times, the dollar complicated the market scene today by staging a rebound of sorts. Just when you thought it was safe to sell the back, the gremlins of surprise came rushing back to the fore, leaving speculators reason anew to scratch their heads this weekend in search of definitive answers about the morrow.
Whatever the reason, the greenback rallied on Friday, recovering about half of what it lost on Thursday against the euro. (Volatility, at least, remains in a bull market.) The dollar’s burst of strength is all the more puzzling in that it comes in the face of gold’s continued climb higher today.
Perhaps we can dismiss the buck’s bounce as a relief rally in that the payroll report for September showed only a mild loss of employment in the U.S. Nonfarm payrolls slipped 35,000 last month, a trifling fraction of the 200,000 decline expected, according to Briefing.com. In line with that slight setback, unemployment for September moved up a bit as well to 5.1%, from 4.9% in August, the Labor Department reported.
All in all, not bad, considering the wreckage from the two hurricanes Katrina and Rita. Unless, of course, you’re of a mind to think that the jobs report is less than fully representative of what took place last month. With so many displaced workers roaming around, trying to make sense of the devastating losses from the twin storms, checking in with the local unemployment office may not be high on one’s list at the moment. Losing a job is no fun, of course, although it hardly compares to losing a house or a family member.
In any case, we return to the question that’s likely to preoccupy us over the weekend, namely, Is the inflation scare over as far as market action is concerned? Perhaps, although we’ll await next week’s market reaction for confirmation or rejection.
On that note, it’s worth reminding that a key driver of rising inflation fears of late–energy prices–resumed its familiar bullish posture today, with the price of crude oil rising by around 80 cents a barrel to $61.84. That inspired the buying of energy stocks, which had taken a beating earlier in the week. The S&P energy sector roared higher today by 2.25%, putting to rest for the weekend at least that the bull market in oil shares is over.
As the boys of Buffalo Springfield once intoned, “Something’s happening here, but what it is ain’t exactly clear.”