One Equation, Two Unknowns

Check out Asian deflation -- it is the alternative to a rising dollar in the presence of managed exchange rates. Note that while we'd usually expect deflation abroad to lead to dollar weakness, this deflation is actually the result of a sharp drop-off in demand for East Asian exports that also exerts downward pressure on those currencies. We are getting deflation instead of currency depreciation because exchange rates are managed. Possibly soon we will get both.