The Federal Reserve's comments Tuesday substantiate the rebirth or extant momentum in a variety of markets. Topping the list is the run to new contract highs -- and revival of upside momentum -- in June T-bond futures (USM3:CBOT).

In its policy statement issued after meeting this week, the Federal Open Market Committee, said "the probability of an unwelcome substantial fall in inflation exceeds that of a pickup in inflation."

Call it an unwelcome fall in inflation, disinflation or deflation, the comments provide the fuel that should continue to propel the middle and long end of the debt curve, a current that could be discerned in the charts at least a week ago , when T-bonds rallied on bearish news. The Fed's words also support the continuation of the downtrend in dollar index futures (DXM3:NYBOT).

While speculation that the central bank could take the unusual step of buying long-dated Treasury securities, such as 10-year notes, has been around for a while, the Fed's acknowledgement of the risk of deflation enhances the odds it actually will take such action. Becoming a debt buyer -- a move that bids up the price of debt instruments while driving down their yields -- is one of the few remaining weapons in the Fed's policymaking arsenal.

By buying debt, the Fed pays cash or gives credits to banks, increasing the quantity of dollars in circulation. So in a situation of low or no inflation, Fed purchases of debt spur demand for Treasuries, underpinning the uptrend in T-bonds, 10-year notes (TYM3:CBOT), five-year notes (FVM3:CBOT) and T-bills. The resulting rush of cash and reserves into bank vaults increases the supply of dollars and acts as an ongoing weight on greenbacks, driving their price down.

Besides promulgating these trends, the combination of cheaper (lower long-term rates) and more plentiful money provide incentives for consumers and businesses to pay off debt and increase spending, factors that should simulate the economy and stocks.

Commodity Connection

Cheaper dollars will also make U.S. exports cheaper , giving an additional boost to the economy. This is a phenomenon we're already seeing in certain commodity markets.

On Wednesday, July wheat (WN3:CBOT) marked its fifth consecutive gain with its best one-day gain of the year.

Wheat surged on news that Egypt, the biggest importer of U.S. wheat, made a sizeable purchase from the U.S. in place of increasingly expensive French wheat.

This rally in wheat overbalances the daily downtrend that has been in place since February.

The next upside test comes at 309, and a break of that level works to confirm that a new uptrend is in place.

A lower dollar and debt yields are also constructive for gold. As the dollar erodes in value, investors seek a secure store of wealth, a traditional role for gold during times of currency degradation. Declining interest rates are ultimately inflationary, the Fed's current implied policy goal. Gold's second traditional role is as a hedge against inflation. Both factors will likely continue to support December gold (GCZ3:COMEX) prices for the remainder of the year.

SARS Update

Finally, to update the effects of SARS highlighted in my last column , I would like to share an email from a RealMoney subscriber who lives in Shanghai:

"Small item representative of how it is. Just got a call from CEO of a garment vendor in a city four hours from Shanghai. He was stopped for an hour driving to Shanghai and 1 1/2 hours leaving the city on a super expressway. Everyone gets his/her temperature taken by the police. I think these measures strike at how exacting government efforts are to check the spread, despite some temporary inconveniences."
Marc Dupee is an independent trader and co-author of the book The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to Marc Dupee.

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