Back in April, the views of many financial pundits on Wall Street were that the dollar was oversold and that it would begin fundamental strengthening against the euro.

In contrast, Financial Intelligence Report told subscribers that the dollar would continue its fall, and advised subscribers to invest in foreign equities and currencies, gold, and certain other sectors that we saw as isolated from the dollar decline.

And we were right. The dollar has weakened further.

Let's take a look at why this is happening.

[Editor's Note:4 Foreign Currency Plays to Beat the Falling Dollar. ]

Early in 2007, the central banks of major currency nations, most notably the European Central Bank (ECB) under its anti-inflationary hawkish chairman, Jean-Claude Trichet, began to see inflationary pressures.

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Facing inflation and being subject to only the single mandate of controlling inflation, the central banks raised their rates.

The U.S. Fed, with its dual mandate of controlling inflation and encouraging economic growth maintained that domestic inflation was low.

This created an increasing interest rate differential against the U.S. dollar, which began a sustained fall against the euro from $1.2904 in January to $1.3660 in April (see chart 1), just short of a major technical support level at $1.3700.

In April and May, the dollar strengthened as expectations of a Fed rate cut receded, with some even forecasting a rate hike.

Then, it became clear, to us at least, that the Fed was afraid to raise its rate and the dollar continued its downward spiral and, yesterday, broke its key technical support level of $1.3700.

In sum, the U.S. dollar has depreciated by a staggering 40 percent against the euro in the past two years. And yet, our Democrat Congress threatens to break WTO rules to enact a tariff wall against China on the grounds that they are depreciating their currency!

[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]

Why has this happened and what are the costs to us Americans?

At the root are two problems, each of which we have highlighted to our readers. Both are political.

The first is that our Congress mandated our Fed not just to control inflation, but at the same time to encourage economic growth.

This political arrogance was sustainable as long as we remained undisputed masters of the "Free World's" economy.

Conditions have clearly changed. Now, America must compete with other economic powers, most notably the European Union, which now has more people, a more widely held currency, and is now the world's largest exporter.

The second political shackle under which our Fed has to operate is the officially "cooked" inflation rate.

With a low inflation rate, our government saves billions of dollars of spending on Social Security and interest payments on its vast debts.

But there are costs to this massive deceit — costs to us Americans, in the long term.

All of us who live in the real world and have to pay for "real" things such as: water, food, energy, and health, know in our guts that our "real" inflation is far higher than the two percent official CPI.

We have regularly explained to our readers how the CPI has been "cooked", especially since the days of Democrat President Clinton. Below (see chart 2) we show the official CPI (at some 2 percent) compared with the more realistic CPI, calculated according to the government's pre-Clinton criteria, which shows our current inflation at some 6 percent, or three times the official rate.

Now even some of the mainstream media are commenting on this subject. The Wall Street Journal ran a major article titled, "Fed's Focus on ‘Core' Inflation Raises Concerns."

Of course the difference between headline and core inflation, a difference of some 0.3 percent barely touches the real problem of a "cooked" rate.

We have regularly shown our readers that we have not been alone in our concerns. Most importantly, it is apparent that major central bankers, companies, and international currency traders share our view.

Their view is so bearish that they have been prepared to sell U.S. dollars, a key reserve currency (until recently, seen as a second only to gold as a financial safe haven) in exchange for the fledgling euro currency.

Here we remind our readers that the euro (not to be confused with the Eurodollar - a U.S. dollar held by a person or entity, not subject to U.S. banking controls) is very new and still only a "political" currency. In other words, as the European Super State has still to be finally accepted by its people, the euro has, as yet, no claim on a unified state economy.

Indeed, it was not long ago that Morgan Stanley took a full page advertisement in the Wall Street Journal to explain that the euro was fundamentally flawed in the long term. Only last year, politicians in countries such as France and Spain were threatening to leave the euro, threatening its total collapse!

The risks still inherent in the euro illustrate vividly how deep has been the decline of international faith in the U.S. dollar.

Central banks, corporations, and individuals the world over have diversified their currency holdings out of U.S. dollars and into the euro, leading to the 40 percent decline in the dollar valued in euros.

In addition, certain oil producing courtiers have demanded payment for their oil exclusively in euros.

This erosion of the dollar as "the" world's sole reserve currency has the effect of draining further America's diplomatic, economic, and financial power.

For instance, in the days of dollar supremacy, our Fed effectively set interest rates for much of the world. This was great hidden financial power as rates were set to benefit the U.S. economy, sometimes at great cost to our main competitors.

So what does all this mean to us as individual people and investors?

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First it means that our imports are more expensive (40 percent more in euro terms) and that is inflationary. And yet our government still tells us that our CPI is only two percent!

One of our largest imports is oil. It is a "multiplier" import because its input-price affects the retail price of many items within the economy, from plastics to heating oil to airplane tickets. And yet our official CPI is only two percent?

The cost of oil has risen world wide. But, with our depreciated dollar, the oil price has risen more for us (to some $70 a barrel) than say, for the Europeans, who buy a barrel of oil for only some $45, on a euro-adjusted basis. (See chart 3 below).

This is significant for our exporters. For example, while their dollar prices look competitive, they have to pay more for their oil-based inputs. This squeezes some of their margins and inflation-adjusted profits.

The proof of the "net" benefit is that, in early 2007, Germany nudged America off the top spot as the major exporter to the world. A month later, China pushed us into third place! So much for the export benefits of a weak currency!

Clearly, our government is afraid to disclose the true rate of inflation. Even our present Republican government resorts to the Clinton-style "cooking" of the CPI.

Most of us are accustomed to believing our government statistics. This is reflected in low bond yields and a low TIPS spread.

The international price of gold is heavily manipulated to the downside by governments, under the Central Bank Gold Agreement. The price of gold is therefore no longer a reliable indication of inflation.

With its totally uncompetitive "dual mandate," our Fed appears to be afraid to raise its rate to reflect the true rate of inflation, particularly when facing a deepening housing bust, a possibly severe credit crunch, and a Presidential election.

Looking very uncomfortable yesterday, poor Ben Bernanke spent a long time saying very little in an apparent effort to persuade his wide TV audience that things were just about fine and all that needed doing was perhaps a little "tinkering" with the Fed CPI target and with bank reserves, making credit a little easier.

Indeed, because most Americans believe the official CPI, inflation expectations are low. With that, we agree.

But what if the CPI is the grand deception we believe it to be, enabling stealth inflation to stalk our economy undetected, like an economic terrorist?

In other words, Bernanke lent all his considerable weight to persuade us that the CPI was true.

Therefore, nothing effective could be expected to be done either to combat what we term, "stealth inflation" or to defend the reserve role of our dollar.

We feel many foreign central bankers, corporate treasurers, and investors will have focused on Bernanke's words. Many will see through them and his decidedly nervous body language.

In short, absolutely nothing was said to put the full faith and credit of America behind the U.S. dollar!

Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
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4 Foreign Currency Plays to Beat the Falling Dollar.