But distrust about the US financial scene is just starting.

Foreign Exchange Currency Outlook: At 8:30 am today we get CPI, probably a rise by 0.7% in June after 0.6% in May or 4.5% y/y, the most since Sept 2005. The range of forecasts is a wide 0.2-1.1% for the monthly version. Core probably rose a lot less, 0.2%. Today we also get industrial production (probably a small rise) and the TICS report on capital flows.

Yesterday, June wholesale prices rose 1.8%, or 9,2% y/y, the biggest one-year gain since 1981. Wholesale prices do not feed consumer prices in the US as directly as in Europe, but it’s clear that we have what is called pipeline inflation pressure.

Higher inflation and slowing growth in the context of financial market “stress,” as Bernanke put it, is just about the worst-case scenario. The only thing worse would be widespread regional bank failures with big banks lacking the capital to take them over.

Some analysts, such as the chief currency strategist at BoA, think that when all the bad news is already priced in to the dollar, we have to expect a relief rally, and probably a lasting one. This point of view has it that, as Market News reports, “the time has come to position for a gradual euro decline in the years ahead… recommending a euro selling around $1.5920, with a stop on a two-day close over $1.6250, and an eventual return to the Jan 22 low near $1.4365.”

Others say the euro “topping out process” could last 6 months or more. We have no evidence the new euro high yesterday was a head-fake. We probably have a range of 1.6175-$1.6200 or 1.6250-75, with euro support on the downside around $1.5710-25.

Currency Traders are not looking so much at individual data points or even broad general statements from officials as trying to puzzle out the relationships among oil and the dollar, financial markets and capital markets, and growth and inflation—Big Picture relationships. It’s silly to say slowdown in the US (and Europe) “should” cause oil prices to fall if real demand from emerging markets is going to overwhelm small declines—and this has been the consensus so far. In other words, there is virtually nothing the US can do to re-balance supply and demand in energy markets, at least in the short run.

Therefore, the drop in oil prices yesterday was based on little or nothing to do with fundamentals and everything to do with speculators re-arranging their positions. Economists say this is a one-time anomaly so it would be really, really interesting to see a further rout in oil that has a more lasting effect. We don’t predict it, but it’s certainly not out of the question. That would make all the economists reconsider their attitude toward supply and demand. Demand doesn’t have to be “real” for it to influence prices. We have accepted that inflation expectations influence real inflation—-so why not accept that speculative demand influences overall demand the same way?

On the horizon are two big developments—oil prices continuing upward (or not), and the US regional banks. As we start getting earnings reports from financial institutions today through Friday, the outlook for the regionals will be clearer. We expect a few failures. We suspect the Fed and Treasury know which ones, too. Unless oil were to continue to fall in a meaningful way (clearly trended), we think the ongoing financial market turmoil is going to be US dollar-negative. This will not come from Freddie and Fannie, which were rescued. That story is over.

But distrust about the US financial scene is just starting.

It’s not severe yet.

It will become severe.

We will see runs on banks as we saw with IndyMac.

This may be foolish since just about everybody’s deposits are insured and safe, as Bush was careful to point out yesterday, but panic knows no sensibility.