Fed eyes dollar drop, but hews to low-rate pledge

By Kristina Cooke

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 raising some prices, 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.

The Fed chairman 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.

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.

"Bernanke finally is doing what any self respecting central banker does, admit that the weakness of the reserve currency of the world matters," said Peter Boockvar, an equity strategist at Miller Tabak and Co in New York. "Jawboning is one thing, but until the world sees actual action, the U.S. dollar will remain in secular decline."

After the global financial crisis saw investors repatriate funds in 2008 pushing up the U.S. dollar, the greenback 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, policymakers 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.

TOUGHER STANCE

The Fed slashed U.S. overnight rates to near zero in December and it has said it would likely keep them ultra low for an "extended period" to support a recovery from the deepest U.S. recession since the Great Depression.

While Bernanke renewed that commitment on Monday, he cited "crosscurrents" in the inflation outlook and said "significant changes" in economic conditions could change the outlook for policy as well, suggesting the Fed would act if the dollar begins to unravel in a disorderly way.

Dallas Federal Reserve Bank President Richard Fisher said in Tyler, Texas, that the currency's decline had been orderly, but that the central bank was aware its commitment to low rates could fuel speculative activity.