Actions speak louder than words. That famous adage is especially true when it concerns the United States Treasury and the Federal Reserve. I remain highly suspicious of this U.S. dollar rally – if you can call it a rally – as signs increasingly point to more trouble ahead for the American economy this year.

Despite harping about a “strong dollar” policy for the last several years, the U.S. actually invites a weak currency for numerous reasons it will never publicly admit. A weak currency boosts exports, curbs the demand for foreign goods (thereby reducing the trade deficit) and encourages investment and ultimately, speculation. Low rates also help to create “bubbles” in financial markets; the latest one in real estate, still deflating, was Greenspan’s creation.

Earlier this month, FOMC Chairman Ben Bernanke made an unorthodox statement concerning the dollar. Historically, any verbal support of the dollar has been the Treasury’s job, not the Fed’s. The fact that the Fed is now verbally “talking up” the buck shows how desperate the government has grown over the dollar’s decline and its resultant inflationary trail since 2007.

Commodity inflation is now center-stage everywhere as dollar-priced raw materials continue to surge in value creating all sorts of headaches for consumers, businesses and governments. Bernanke must be scratching his head because this marks the first time in the post-WW II period that the United States, probably in a recession in Q2, is also witnessing an explosion in commodity prices as the world’s largest economy stumbles. Blame it on the emerging markets, namely China, which now consumes virtually every conceivable raw material.

The Federal Fund futures now shows a high likelihood the Fed will start raising interest rates later this fall. Will the Fed start hiking rates while labor, real estate and bank credit markets are still contracting? I’d say the real odds are 10-1 against a rate hike now.

The Fed will not raise interest rates until next year -- at the earliest. The dollar remains cheap and heavily oversold compared to every currency in the world, except maybe the Zimbabwean dollar. But cheap can get cheaper…The dollar is tied to housing. Until the real estate market finds a bottom, the dollar will remain under pressure and probably test new lows against most foreign currencies. I don’t see the dollar tumbling from these levels, but I also can’t see the currency mustering a significant rally in the absence of higher interest rates.

Since its creation in 1913, the Fed has never hiked lending rates while the unemployment rate is rising. It won’t hike now. Also, 2008 is an election year -- another reason why the Fed won't tighten. It remains imperative for U.S. policy-makers to appear highly concerned about the dollar’s decline; the Fed’s admission that the dollar is a concern shows how the government wishes to place a floor on speculators betting against the currency and hopefully, arrest the huge gains in oil and other commodities in the process.