Fed Chair Comments Boost Greenback

By Jennifer Yousfi
Managing Editor

U.S. Federal Reserve Chairman Ben S. Bernanke came out in support of a stronger U.S. dollar yesterday (Tuesday), indicating the Fed would remain on pause at its next meeting.

Speaking via satellite at the International Monetary Conference in Barcelona, Spain, Bernanke said the Fed is working with the Treasury to "carefully monitor developments in foreign exchange markets." The Fed Chair said he was aware the effect of the dollar's decline on inflation and price expectations, Bloomberg News reported.

Also, interest rates are currently "well positioned" to promote both growth and stable prices, he added.

"I can't recall such a strong defense of the dollar from a Fed chairman," Sophia Drossos, a currency strategist at Morgan Stanley (MS) who used to work at the New York Fed, where she helped manage the central bank's foreign-exchange holdings, told Bloomberg. "The Fed is putting its marker down in letting the market know that a weaker dollar would be detrimental."

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Ordinarily, the state of the greenback would fall under the Treasury's watchful eye, but Bernanke's comments show the Fed chief is aware of the effect the aggressive rate-slashing campaign of the past several months has had on global currencies. The dollar has dropped 16% against the euro, driving up the cost of dollar-denominated commodities such as oil.

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

He went on to acknowledge the Fed's commitment to "ensuring that the dollar remains a strong and stable currency."

The comments from the Fed chairman gave an immediate boost to the dollar, as it climbed to $1.547 against the euro and commanded 104.9 against the yen at the New York close.

Analysts, as well as Fed futures, are pointing to a Fed on pause at the June meeting of the Federal Open Market Committee (FOMC). It is expected the FOMC will vote to hold rates steady, especially in light of the minutes of the April meeting, which revealed the last vote to reduce the Fed Funds rate 25 basis points was a close call for many.

At least one Fed member has gone on record as being against further cuts. Dallas Fed President Richard W. Fisher is the only FOMC policymaker to "dissent" three times on prior votes to lower the central bank's key interest rate. Fisher has gone so far as to suggest holding rates steady may not be enough to fight current price pressures.

"If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic" U.S. economy, Fisher said during a speech in San Francisco last week.

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