Will Bank Rates Have to Respond to Dollar Weakness?

Surges in the prices of oil and gold recently are symptomatic of a looming problem: the weakness of the U.S. dollar.

Oil and gold are both traded in dollar terms, so when their prices are rising, it may not be entirely a sign of demand for those commodities. Instead, it can be a function of a weakening dollar, and given the dollar's recent slide relative to the euro, it appears that dollar weakness is an important factor in driving the prices of those commodities upward.

Concern about the dollar represents perhaps one of the biggest unpaid bills of the financial crisis. The measures taken to shore up the financial system, such as lowering interest rates and running up the deficit, are not healthy for the U.S. currency.

Why does this matter? In an economy as import-dependent as ours, a weak currency is inflationary.

On the surface, the good news would seem to be that inflation would be likely push up bank rates, from savings account interest rates to short- and long-term CD rates. However, this rise would be something of an illusion -- when bank rates rise simply to keep pace with inflation, there is no real benefit to depositors.

An even worse scenario would be if bank rates were slow to respond to a resurgence of inflation. This would result in depositors actually losing ground to rising prices.

A key factor to watch, then, in the coming weeks is the U.S. dollar. The more it continues to drift downward, the more important it will be to shop for bank rates that will keep pace with the likely rise of inflation.

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