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Adjusted For Inflation, Dollar Hits Fiat-Era Low
CNBC.com | April 28, 2011 | 09:27 PM EDT

A trade-weighted measure of the U.S. dollar against a broad basket of currencies that includes the Yen, Euro and China’s Yuan is at a post-gold standard low when adjusted for inflation, according to calculations by Deutsche Bank’s economic team. The milestone could be viewed as a failure of the country’s monetary and fiscal policies upon which all paper – or fiat – currencies are based.

The Broad Trade-Weighted Dollar Index, which was created by the Federal Reserve, differs from the more popular “Dollar Index” because it includes a larger group of currencies and is weighted based on foreign trade. The stellar economics team at Deutsche Bank, led by Joe Lavorgna, then adjusts this measure for inflation to get what they believe to be the true measure of the dollar’s value in the world.

“In our risk scenario, little progress on the fiscal front raises the probability of a fiscal crisis and the odds that the Fed becomes the buyer of the last resort,” said David Woo, currency strategist for Bank of America Merrill Lynch, in a note to clients today. “This would accelerate the process of the USD’s demise as the global reserve currency and cause it to decline in a disorderly manner.”

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