Market Report: U.S. Dollar Gets 'Golden Slap in the Face'

What does India's huge central bank gold purchase say about the state of the oil market? Probably a lot more than many people realize as the price of oil is dollar dependant and the dollar just got disrespected by India's Central Bank. The oil had another wild day breaking before rallying back on strong factory order data showing that orders increase for fifth month in six, rising stronger-than-forecast 0.9%. Yet the most important market story was the purchase by India's central bank of 200 tons of gold. Was India sending a message to the Fed that enough is enough when it comes to their economic policies? Is India going to get out of the US debt buying business and instead opt for gold? Will other global central banks follow suit thereby making our US debt impossible to finance? Will the market place lose confidence in the dollar causing another weak dollar inspired oil price run?

India sent a strong message to the market and the Fed ahead of today's big Federal Open Market Committee announcement. India's Finance Minister Pranab Mukherjee gloated that India's economy is strong while the economies of the US and Europe have collapsed. Not to mention of course not only that they have the cash to buy the gold. This slap at the dollar raises the pressure on the Fed as it seems content with the dollar devaluation and raises the potential stakes with keeping polices status quo.

Will the Fed respond to this move by India? Could they shock the market by providing us an exit strategy out of this fiscal fire trap that is leading to perhaps the mother of all asset bubbles? The India purchase could start another commodity buying spree stretching out an already one sided carry trade. Fears that are being picked up in today's Wall Street Journal. The Journal says that "Concerns are mounting that efforts by governments and central banks to stoke a recovery will create a nasty side effect: asset bubbles in real-estate, stock and currency markets, especially in Asia."

The World Bank warned Tuesday that the sudden reappearance of billions of dollars in investment capital in East Asia is "raising concerns about asset price bubbles" in equity markets across Asia and in real estate in China, Hong Kong, Singapore and Vietnam. Also Tuesday, the International Monetary Fund cited "a risk" that surging Hong Kong asset prices are being driven by a flood of capital "divorced from fundamental forces of supply and demand."

Behind the trend are measures such as cutting interest rates and pumping money into the financial system, which have left parts of the world awash in cash and at risk of bubbles, or run-ups in asset prices beyond what economic fundamentals suggest are reasonable."

The question is will the Fed get the message. The party line is that the Fed will stand pat and the markets are showing no fear that they could change their mind. The market is complacent and has been led that way by the Fed. Will the Fed surprise us?