11:15 pm - US Dollar & Inflation Rules Now.

By David Roman

A Dow Jones Newswires Column

SINGAPORE (Dow Jones)--It used to be the casethat if the U.S. stock market was rising, the dollar was probably falling, and vice versa. Not any more.

Rather than being a somewhat predictable risk aversion play, the U.S. dollar is starting to moveon other cues, notably inflation expectations. And that's not good news for dollar bulls.

Investorsand economists are growing concerned that if ultra-easy money policies in the U.S. manage to squeezesome growth out of the economy, they could also fuel a quick uptick in inflation. Such a scenario wouldeat into the dollar's value and diminish its safe-haven status.

This changed correlation withstocks has been obvious since Wednesday. For the last two days, the Dow Jones Industrial Average is down2.1%, while the broad DXY dollar index is down 2.7%.

Not that long ago, though, the 'stocks down/dollarup' thesis had clearly been in play: Since September, when global markets crashed on the back of LehmanBrothers' collapse, the Dow Jones Industrial Average has fallen 25%, while the DXY is up 5%.

Risingoil prices - never a good friend of the dollar - and bond yields indicate inflation concerns are realand growing. The U.S. administration is also pumping liquidity into the economy at a great rate, withthe budget deficit expected to come in around 13% this year.

'And the two biggest factors thatmight contribute to higher inflation - stimulus spending and economic recovery - have yet to impact theinflation rate,' notes Darrell Jobman, a senior analyst with TraderPlanet.com.

The Federal Reserveis focused on preventing deflation right now, with the U.S. consumer price index falling in March andApril, but its policy of quantitative easing may overshoot the mark.

And a falling dollar willadd to price pressure, as it threatens to import inflation via resurgent commodity costs.

Oneadded danger as the Democratic administration, in control of Congress, looks to spend its way out ofthe economic malaise, is that Republican-leaning economists are cheering on and asking for high inflationto erode the U.S. debt problem - as inflation boosts the prices of goods and diminishes the value ofdebt.

Gregory Mankiw, a former White House economic adviser, and Kenneth Rogoff, a former topeconomist at the International Monetary Fund, told Bloomberg earlier this week that inflation as highas 6% would be a good thing for the U.S.

They didn't say though it would be a good thing forthe dollar.

Recent dollar weakness may give way to some consolidation in coming days, as marketstake a deep breath and realise that other currencies are not much more attractive. This view has somemerit, especially as energy prices remain well below year-ago levels.

Still, investors may bewell advised to broaden their watch from a purely stocks/dollar correlation to an environment that includescommodities and is less predictable when it comes to where the dollar is heading.