Oil at $100 a barrel and gold at $850 an ounce? Dollar at 1.5 against Euros? These were the speculations ran wild during the past week. Before trying to address these questions, what are the relationships between oil and gold, dollar and Euro, interest rate and inflation?

Historically, the Queen of metals (gold) and the King of commodities (oil) tend to dance together, with the oil/gold price ratio at an average of 15:1. The price of oil has significant implication for inflation. An increase in oil not only translates into more expensive transportation, utility and heating for consumers, it also pushes up cost (both for the production and distribution) of virtually every consuming products. When oil price goes up, the pressure of inflation is on.

Contrarily, gold has complex implication for currency. Before 1971, U.S. dollar was backed by gold and the price of gold was fixed at $35. That year, the U.S. abandoned gold convertibility. Four years later, OPEC officially agreed to accept U.S. dollars as the exclusive payment for its oil, scrapping gold as the mean of exchange. These changes caused a shake up in oil and gold’s prices in dollar. Oil soared to $40 from $3 per barrel; gold flew from $35 to $850 per ounce.

Generally, when oil price goes up, people start worrying about inflation. While fear of inflation pushes people to invest in gold to offset the effect of inflation, hence driving up the price of gold.

Now, how did the U.S. dollar become so weak? There is a law in economics called the Iron Triangle. It says among a currency’s interest rate, exchange rate and convertibility, only two can be achieved. It is impossible to achieve (or control) all three elements. The U.S. dollar is fully convertible and the Federal Reserves sets the interest rate. It means that when the Fed cut interest from 5.25% to 4.5%, the dollar has to become weaker.

A lower interest rate stimulates the economy, but it is also innately inflationary because in order to lower the interest rate, more money has to be bumped into the economy. A weak dollar could help to correct the U.S.’ trade deficit, but it also tends to drive up prices simply because of the paper money is worth less – rather than a result of supply and demand.

Put everything together, expensive oil, expensive gold, lower interest rate and a weak dollar are all harbingers of inflation. The Fed’s interest rate cut made the dollar weaker, and it drove up the prices of oil and gold, which translates into possible inflation. Some may view this as iron evidence for a new world of high inflation from now on. It may be true if you still believe the world of dollar hegemony is going to continue. The question becomes is it? With OPEC and other emerging markets prepare to diversify their currency holdings from a single U.S. dollar, the dollar dynasty may well be toward an end.