How the Fed Could Kill the U.S. Dollar Tomorrow

Months or years from now, when analysts are studying the death of the U.S. dollar, they'll look back and see that the greenback's demise began on a specific day - Wednesday, April 27, 2011.

As in ... tomorrow.

At 12:15 p.m. tomorrow, at the conclusion of a two-day Federal Open Market Committee (FOMC) meeting, we'll find out whether U.S. Federal Reserve Chairman Ben S. Bernanke and his policymaking posse opted for a sharp increase in U.S. interest rates - which appears to me to be the only solution to a looming third-quarter crunch.

Unfortunately, I don't think that Bernanke & Co. will make the needed move.

And without that sharp rate increase tomorrow, investors can look forward to rampant inflation, an evisceration of the U.S. Treasury bond market and - in a worst-case scenario - the death of the dollar.

Let me show you why....

It's Time to Worry About the Death of the Dollar
For the last two years, the U.S. economy has been supported by the twin catalysts of fiscal and monetary stimuli.

Fiscal stimulus seems likely to continue for some time yet - even the most avid Tea Party budget cutters don't see their way to cutting more than $100 billion or so off this year's $1.6 trillion deficit.

But monetary stimulus is another matter.

The Fed's so-called "QE2" (quantitative easing/second round) purchases of U.S. Treasury bonds are supposed to come to a sharp end on June 30. That makes July a crucial month - for the American economy, for the country's bond markets and, most of all, for the performance of the dollar.

These crucial monetary-policy issues will be reviewed at the two-day policymaking FOMC meeting that begins today (Tuesday) and concludes tomorrow. Policymakers are expected to leave the benchmark Federal Funds target rate in its current range of 0.00% to 0.25%.

If Bernanke wants to devise a "QE3" to follow his QE2, he needs to do it now: The next FOMC meeting is in late June, which is far too close to the expiration of QE2. (read more)