Today the US Dollar Index made a key break down below key 3 year support range. I wrote about the dollar index yesterday indicating that I expected weakness into November 2010 and a possible break of support.
I did not expect this break to occur the next day, but this is how it looks today. We are still early in November and do not have a final monthly November close but it is looking like it will be a valid break through to the downside for now. The one possible wild card with the US Dollar is the current extremely bearish sentiment. It is difficult to see the dollar breaking down all the way to the 71 level from here given the current bearish sentiment. But for now I think we need to respect the break of trendline support on the monthly basis.
This break in the dollar should correlate to rising inflation in 2011. Already we are seeing commodity prices go through the roof again and the gold price is leading the way. This break in the dollar appears to be the key to gold 2000 to 2600 perhaps by 2012.
If you look at a long term chart of the inflation rate one can see that the inflation rate has been in a long declining trend since 1990. It did get a brief surge in the 2005 to 2007 period but then initiated a total collapse.
Now the central banks are hell bent on pumping inflation back into the system and the million dollar question is whether or not they can engineer it in a contained manner, or does the possibility exist that it will start to spiral out of control ? I don’t know the answer but I do know that it will be important to keep an eye on inflation trends going into 2011.