The U.S. dollar rose versus the euro on Thursday amid signs of higher inflation in the United States while reports showed contraction in the euro zone's economy.

Analysts said higher prices in the short term may help boost the case for U.S. interest rate hikes and the dollar -- which in turn would increase the return on dollar-denominated assets -- but over time it would hurt the U.S. economy.

"Higher inflation is positive for short-term interest rates in general, but an inflation-driven rise in yields wouldn't necessarily be good for the dollar in the medium term," said Bob Lynch, a currency strategist at HSBC in New York.

Meanwhile, in a research note Merrill Lynch wrote, “inflation is expected to remain an issue during coming quarters, fueled not only by higher commodity prices, but also by wage increases and an attempt by companies to rebuild profit margins.”

Here’s how Merrill recommends playing it.

WINNERS                        LOSERS 

Pharma                        Machinery
Industrial Congloms.       Chemicals
Food Products               Semiconductors
Insurance                     Electronics
Household Products         Metals & Mining

Source: MerrillLlynch U.S. Quant. Strategy

****************

Traders, how would you play it?

Jeff Macke, Tim Seymour, and Guy Adami all say to get long the dollar.

Or try Quint Tatro’s patriot trade. It’s long the UltraShort MSCI Emerging Markets ProShares

EEV loading...

Quote  |  Chart  |  News  |  Profile

[EEV  Loading...      ()   ] and long the Ultra S&P500 Proshares

SSO loading...

Quote  |  Chart  |  News  |  Profile

[SSO  Loading...      ()   ] against it.

_____________________________________________________
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Trader disclosure: On Aug 14, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Quint Tatro Is The Principal Of Tatro Capital; Tatro Owns (C), (GS), (INTC), (JPM); Tatro Capital Owns (GS), (EEV), (QQQQ), (SPY), (SSO), (UYG)’ Adami Owns (C), (AGU), (GS), (MSFT), (INTC), (NUE), (BTU); Macke Owns (MSFT), (COST), (UUP), (WMT); Seymour Owns (AAPL), (EEM), (MER), (TSO); Jon Najarian Owns (WPI) Call Spreads,  (NVDA) Call Spreads

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