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Bernanke worried about dollar, toughens inflation message PDF Print E-mail
Thursday, 05 June 2008

Federal Reserve chairman Ben Bernanke has signaled that the US central bank is worried about the dollar, saying the sagging currency has led to "unwelcome" inflation pressures, reports AFP.

The comments on the US currency marked a major shift for Bernanke, who normally defers to the Treasury on such matters.

Speaking via satellite to a monetary conference in Barcelona, Spain, Bernanke offered a mixed assessment of US economic conditions, while highlighting concerns about inflation and the dollar.

"The challenges that our economy has faced over the past year or so have generated some downward pressure on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation," he said, according to the text of the remarks released in Washington.

"We are attentive to the implications of the changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."

The Fed's dual mandate is to maintain price stability and promote maximum employment in the US economy.

The greenback strengthened after his comments, with the euro falling to 1.5449 dollars at 2100 GMT from 1.5540 in New York late on Monday.

Bernanke noted that "in collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets."

"This is a major shift for the Federal Reserve towards the US dollar as chairman Bernanke specifically mentions the importance of the currency for the Federal Reserve," said Andrew Busch at BMO Capital Markets.

"This should mean the (Fed) is concerned about the lower value of the currency on inflation and thus the likely reluctance of the interest rate setting body to lower interest rates further. And perhaps signals that rates are poised to be raised in the future due to inflation."

Michael Woolfolk at Bank of New York Mellon said Bernanke's comments were "surprising" as it was not usual for a US Fed chairman to speak directly about the dollar and factors affecting its value since the "strong dollar policy" was outlined in the 1990s.

"Bernanke's comments today are clearly intended for a specific purpose with the approval of both the US Treasury and the G7," referring to the Group of Seven industrialized nations, whose finance ministers meet later this month in Japan.

The dollar has been slumping against other major currencies, especially the euro, as the Fed has slashed its base rate from 5.25 percent last September to 2.0 percent. The European Central Bank meanwhile has been holding its base rate at 4.0 percent, making the euro more attractive for investors.

While Bernanke made no specific comment on the Fed's next move, he suggested there would be no immediate interest rate cuts: "For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate."

On the overall US economic outlook, Bernanke said activity remains sluggish but is poised to rebound. However he said the rebound remains dependent on a recovery in the troubled housing market and some stability in energy prices.

"Activity during the current quarter is also likely to be relatively weak," he said.

"We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad."

He added that the Fed sees growth "picking up further in 2009," but cautioned that "until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth."

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