The two largest economies, the US and China, are following loose monetary policy. The result is that inflation is still growing throughout the world, which will eventually have to be contained in the US by higher interest rates. Yo Yo Ben Bernanke dropped interest rates too fast and has been too slow to raise them. When he starts they will have to go up faster, which will take the dollar with them.

Although China’s notoriously wonky numbers have shown a drop in inflation, the factory gate is running about 10%. The government is worried about social unrest due to the drop in export industries and has signaled that the renminbi will not continue to increase to encourage growth. In the US inflation is rising over 5%. The Fed has not raised interest rates, because they feel that inflation will be tamed by slower growth. World wide demand is still strong and growth, especially in the US export industries, will result in higher inflation and eventually higher rates and a stronger dollar. The ECB has taken a more conservative course, which has slowed growth and will result in a weaker Euro and the end of the cycle.