Fed eyes dollar drop, but hews to low-rate pledge
NEW YORK (Reuters) - Federal Reserve Chairman Ben Bernanke, in a rare comment on the U.S. dollar's value, on Monday acknowledged the currency's slump was causing some prices to rise, but said other factors restraining inflation were winning the day.
While showing he was not indifferent to the dollar's slide, Bernanke said tight credit and a weak job market would weigh on the economy's recovery, and he repeated the Fed's pledge to keep interest rates exceptionally low for "an extended period."
"We are attentive to implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," he told the Economic Club of New York.
Bernanke said the central bank's commitment to its dual objectives, along with the strength of the U.S. economy, would help ensure that the dollar was strong and a source of global financial stability.
The dollar initially rose on his comments, but fell back later in the day, hitting a 15-month low against a basket of six major currencies. Gold prices hit record highs and oil prices settled up more than 3.0 percent as the dollar weakened.
A weaker dollar typically supports commodity prices because dollar-priced contracts -- such as those for oil and gold -- become cheaper for buyers using other currencies.
U.S. stocks rose broadly on Monday, sending indexes to 13-month closing highs, on reinforced expectations that interest rates would stay low for a long time.
The Fed slashed U.S. overnight rates to near zero in December to support a recovery from the deepest U.S. recession since the Great Depression.
"Bernanke just locked the Fed into an easy monetary policy, at least in the short term, so any implicit threat of response to dollar declines simply has zero credibility," said Stephen Stanley, U.S. economist at RBS.
Fed officials usually defer to the U.S. Treasury Secretary on issues relating to the dollar's value, although Bernanke has commented on the currency in the past.
The dollar had risen in 2008 as the financial crisis spurred investors to turn to the greenback as a safe haven, but it has lost about 16 percent since mid-March this year as risk appetite has returned.
"These safe-haven flows have abated, and the dollar has accordingly retraced its gains," Bernanke said.
The dollar's decline this year has sparked concern from Paris to Beijing. In Europe, policy makers worry that the strength of the euro is harming economic recovery prospects while the dollar's drop has eroded the value of the Chinese government's massive holdings of U.S. Treasury debt.
Chinese banking regulator Liu Mingkang said on Sunday that low U.S. interest rates and a weak dollar posed a "new systemic risk" because they were fueling speculation in overseas asset markets, a particularly pointed criticism with U.S. President Barack Obama visiting China.
NO BUBBLES Continued...
