Fed shift leads to dollar drubbing

The dollar is squirming under the Fed's new-found embrace of inflation.

The trade-weighted dollar index dropped below 80 for the first time in six months Wednesday, a day after the Federal Open Market Committee said for the first time that inflation readings are getting too low for its taste.

Looks familiar, doesn't it?

The euro rose to $1.34, its highest level since this spring's debt crisis, and the yen recovered some of the ground the Bank of Japan tried to give away with last week's intervention.

The dollar sell-off comes despite the Fed's decision to stop well short of committing to another round of asset purchases, as many analysts expect it to do in coming months. Some economists believe the Fed should buy more Treasury bonds and potentially take other action to keep money flowing into a soft economy that is facing a second-half slowdown in government spending.

They argue that Fed chief Ben Bernanke and his colleagues can reduce economic uncertainty and spur private spending by further loosening policy, even beyond the near zero prevailing interest rates and the $1.75 trillion they spent buying bonds from banks.

More Fed free money will help prevent a destabilizing spiral of falling prices and weakening demand, they contend.

The flip side of this view is that it's impossible to say exactly what outcomes easier Fed policies might produce, save one. Another round of easing will surely further erode the value of the dollar, skeptics say, in a repeat of the damaging boom-bust cycle the economy has been stuck in for a decade.

The ultimate outcome of the Fed's easing policy, they charge, is the massive destruction of wealth for U.S. savers and taxpayers, as the dollar's purchasing power plunges.

The dollar index remains well above its lows at the end of last year, but every cautious statement from the Fed feeds the fear that we will revisit those levels soon enough.

"The truth is that Bernanke will do whatever it takes to foment another asset bubble," EuroPacific Capital economist Michael Pento writes. "Because the U.S. doesn't have a diversified manufacturing base, the Fed has helped supplant the real economy with the building and servicing of bubbles."

As we are finding, that is not a recipe for satisfaction when it comes job growth or much else.