On Wednesday, several commodities rang in the new year by racing higher. Not only were the headline commodities like gold and oil up sharply, but grain futures also surged.

Much of the strength in gold and oil can be attributed to a return of the inflation trade -- that is, gold and oil moving higher while the dollar moves sharply lower. Because there was little news specific to gold and oil on the day, most traders attributed the move to higher prices to the dollar's fall.

That fall happened after the Institute for Supply Management issued a very weak report on the state of U.S. manufacturing output. The report showed a contraction in manufacturing output and seemed to increase the possibility of recession in the U.S.

Most traders assumed that the Federal Reserve would cut interest rates in order to stave off a recession, but the lower interest rates would also make the dollar less valuable. As a result, dollar futures plunged while gold and oil futures rose. While both gold and oil did eventually settle at new record high prices, the real headline for the day was the first trade in crude oil at $100 per barrel.

Following the surge on Wednesday, oil prices remained mostly steady early on Thursday before the Department of Energy released its weekly Petroleum Status Report that showed oil inventories falling more than expected. By midday Thursday, oil had once again surpassed the $100 per barrel level but closed around $99 at day's end.

It is unclear whether or not oil can remain at these record high prices for the foreseeable future in the face of worries over U.S. economic growth, but further weakness in the dollar and further interest rate cuts by the Federal Reserve could continue to support prices in the near term.

Grain prices also started the year with a bang as corn, wheat, and soybeans all saw huge gains with corn and soybeans reaching new contract highs. A perfect storm of record demand and falling inventories have been propelling crop prices higher for months now.

The storm seemed to intensify this week when traders noticed that China has begun to allow its currency to appreciate at a very rapid pace in recent weeks. At the beginning of November, the exchange rate stood at 7.45 yuan per dollar (or $13.42 per 100 yuan). By mid-December, the rate was down to 7.37 yuan per dollar. Since then, the rate has fallen to 7.28 yuan per dollar ($13.74 per 100 yuan).

The falling yuan per dollar exchange rate means that a Chinese citizen can get more dollars for the same amount of yuan. Reportedly, China has undertaking this rapid appreciation to help offset some of the rapid rise in grain prices.

While this strategy may help take some of the sting out of the high prices, most traders also viewed it as a very bullish indication on Chinese demand. While high prices may be expected to crimp demand, allowing the currency to appreciate should also help to keep Chinese demand very high.

While corn and soybeans settled at contract highs on Wednesday, the real story was wheat as it rose the exchange imposed limit of 30 cents on Wednesday and followed through with an additional gain of 30 cents by Thursday' close. The two day move for wheat was more than 6.5 percent.

Grains could continue higher in coming weeks if weather problems develop in warm or southern hemisphere growing areas like Brazil, Argentina and India.

Walt Breitinger is vice president of commodities at A.G. Edwards and Sons. He can be reached at (219) 738-6460.