The Federal Reserve is monitoring currency markets “closely” and will conduct policy in a way that will “help ensure that the dollar is strong”, Ben Bernanke said yesterday in rare comments on the US currency.
In remarks apparently aimed at reassuring markets and foreign governments that the central bank is not indifferent to the fate of the dollar, the Fed chairman said “we are attentive to the implications of changes in the value of the dollar”.
He added that the Fed “will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability” – and that in doing so it would support the value of the currency.
The dollar briefly jumped on his remarks, but then gave up some gains as traders questioned whether Mr Bernanke was prepared to go beyond talking in support of the currency.
For the Fed chairman to comment on currencies at all is highly unusual. By convention, the US Treasury secretary is the sole US official who talks about the dollar.
Mr Bernanke's comments came amid growing international unease about the weakness in the dollar, which forms a backdrop to President Barack Obama's tour of Asia. Liu Mingkang, China's banking regulator, criticised the Fed at the weekend for fuelling the dollar carry trade in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad, creating the risk of new asset price bubbles.
The Fed chairman indicated that the US central bank would not ignore the impact of rising commodity prices when evaluating the outlook for inflation. He said he would not rule out using interest rates to combat new asset price bubbles, even though he did not see obvious mispricing in the US at this stage.
The dollar tumbled to near 16-month lows yesterday as traders took comments from a number of central bankers as a green light to continue dumping the currency and to use it as a fu