Today, despite the release of better than expected news on inflation and international trade, the dollar declined, ending the week sharply lower. The “good” news on trade was the release of a greater than expected 9% narrowing of the July trade deficit to $50.1 billion, verses expectations of $51.5 billion. On the inflation front, the good news was the unexpected .1% decline in August producer prices, verses expectations of a .2% rise.

Normally, such news would be received positively in the currency markets. Not the case today, as the dollar reacted by falling against its foreign counterparts. Could it be that traders are finally getting wise to government shenanigans when it comes to the inaccuracy of economic numbers, and are no longer being fooled by the lowered expectations game?

Lower inflation in theory should be supportive of the dollar, as inflation basically measures the dollar’s loss of purchasing power. However, rather than accurately reflecting inflation, perhaps investors are finally beginning to view deceptively benign PPI and CPI reports as fig leaves that provide the Fed with the necessary cover to ignore the emerging inflation threat. From this perspective, PPI and CPI numbers which understate inflation, are themselves inflationary, and explain why the dollar fell as a result of the news.

On the trade front, while the August deficit was not as bad as some had feared, it still represents the second worst monthly deficit ever, exceeded only by last month’s $55 billion. The fact that this was perceived as good news shows just how low the trade bar has been lowered. Perhaps foreign exchange traders are beginning to take notice of the fact that the trade deficit is now so large, that even “good” news is horrific, and that no matter what the monthly trade deficit is in relation to expectations, its bad news.

If the cat is finally out of the bag, as the dollar’s decline following the released of economic data today and Greenspan’s testimony on Wednesday, seems to indicate, the ability of the Fed, the Bush administration , and Wall Street to talk up the dollar, could be in jeopardy. If that is indeed the case, the day of reckoning for the over-leveraged, non-productive, savings-short, U.S. economy is close at hand, and the time to protect ones wealth though dollar divestment is nearing an end.