FED FOCUS-Fed breaks silence on weak dollar, signals concern

By Alister Bull

WASHINGTON, May 21 (Reuters) - The Federal Reserve has broken its traditional silence to highlight the danger of a slide in the dollar's value, even as the U.S. currency suffers fresh weakness on foreign exchange markets.

Fed documents on Wednesday revealed increasing discomfort at the dollar's impact on import prices, with one Fed official also blaming interest rate cuts for sapping the greenback's value and contributing to a climate that further impairs economic growth.

This follows a noticeable increase in dollar remarks from Fed officials, including from Fed Vice Chairman Donald Kohn, trespassing on the turf of the Treasury, which by long agreement acts as the country's spokesman on foreign exchange.

The dollar had hit record lows against the euro and other major currencies as the Fed slashed interest rates to shield the U.S. economy from the subprime mortgage market meltdown. A recent rebound petered out on Wednesday, and the dollar fell back to a one-month low against the euro on concerns over U.S. economic weakness and unanticipated strength in Europe.

European politicians complain the euro's relative strength hurts their exports, and the Group of Seven rich nations nodded to those concerns with a warning on excessive currency volatility in April.

But the U.S. Treasury has shown no inclination to bow to foreign pressure to do something about its sickly currency, beyond doggedly repeating the mantra that a strong dollar is in the U.S. interest, and that strong long-term fundamentals of the U.S economy will be reflected in exchange rates.

Kohn's remarks on Tuesday seemed innocuous. He observed that a weaker dollar boosts U.S. exports while potentially fueling imported inflation -- a statement of accepted economic wisdom.

But policy-makers of Kohn's stature do not make accidental references to the dollar in carefully crafted speeches, and it was not an isolated incident.