For the currency markets I follow, and every other financial market right now, inflation is the buzz word. Each and every new report of rising prices releases new concern — whether the threat is revealed in Brazil, the United States, Europe or even your local grocery store. No one likes forking over more cash this month than they did last month ... for anything. But this inconvenient fact is being increasingly realized across the world. And that's where currencies come into play. Currencies are the medium of exchange you use on a daily basis to purchase goods and services. And you depend on that purchasing power holding its value. Soaring inflation means, among other things, that the credibility of the legal tender in your wallet is being called into question. ...

This past week was a roller coaster ride in the currency markets, and it sure ended with a bang. I’ll get to the big news in a second. And I’ll also tell you what to make of this market.

But first, I want to do a quick day-by-day rundown of what happened in the currency markets …

Tuesday:

Ben Bernanke revealed new concern over inflation and spoke directly about the weaker dollar.

Knee-jerk reaction in the currency markets: The dollar jumped.

Thursday:

European Central Bank President Trichet signaled interest rate hikes may come as early as July.

Knee-jerk reaction in the currency markets: The euro soared.

Yesterday:

U.S. Non-farm Payrolls were reported down 49,000 (better-than-expected) for the month of May. But U.S. unemployment leapt by half a percentage …

Today markets fretted about Lehman Bros. and pondered the messages from Bernanke and impending congressional hearings regarding commodity market “speculation”. The dollar rallied from Bernanke’s comments and commodity markets were pressured by it and potential congressional action.

Volume picked up substantially from the malaise of the past few weeks and breadth was negative particularly on NASDAQ volume. [Yahoo/Finance has an obvious glitch in adding columns.]

…

Too severe, or not too severe; that is the question.

I’m talking about the U.S. recession that we’re already in, about to be in, or hoping to avoid.

At this point it depends a lot on how you approach the subject, but assuming for a moment that recession is inevitable, analysts and economists are asking: How much will growth contract? Can Mr. U.S. consumer muddle through, or will he stumble and fall? And how much have financial markets already discounted an official recession?

Today, I’ll answer these questions and tell you what to expect in the currency markets, namely the U.S. dollar. First, let’s address …

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