Bernanke sets up for easing amid currency worries

WASHINGTON (Reuters) - The head of the Federal Reserve on Friday cemented expectations of more U.S. stimulus and emerging economies moved to curb the currency turmoil they blame on super-low interest rates in rich countries.

A general view of Singapore's financial district from Merlion Park April 14, 2010. REUTERS/Tim Chong

Brazil will unveil measures next week to try to rein in its rising currency which is close to a two-year high against the dollar, and Colombia took new steps to contain the rise of its peso.

Japanese Finance Minister Yoshihiko Noda said countries must work together to strengthen the global currency order, trying to soothe tensions ahead of meetings of top finance officials in South Korea next week.

The U.S. Fed is considering further extraordinary economic measures to lower unemployment and avoid a damaging bout of deflation at home.

Near-zero interest rates in rich countries, and the prospect of the United States pumping more dollars into its economy, are funneling huge capital flows into high-yielding emerging markets, pushing up their currencies and prompting talk of a “currency war”.

European Central Bank Executive Board member Juergen Stark told a German newspaper it would be “fatal” if countries raced to devalue their currencies.

The United States backed away from a showdown with Beijing over the value of China’s yuan.

The Treasury Department delayed a decision on whether to label China as a currency manipulator until after the U.S. congressional elections on November 2 and a Group of 20 leaders summit in South Korea on November 11.

China’s currency has been rising in recent months. U.S. and EU policymakers still see it as significantly undervalued and a contributor to the imbalance in the global economy.

Adopting a more positive tone, the Treasury welcomed a recent speeding up in the strengthening of the yuan, possibly helping to ease tensions at next week’s G20 meeting.

Beijing earlier kept up the heat on Washington, saying it should not make China a scapegoat for its own problems of low growth and high debts that have required the U.S. central bank to turn to extraordinary measures to reflate the economy.


Federal Reserve Chairman Ben Bernanke and others at the U.S. central bank have stated repeatedly that their policy mandate is strictly domestic and that slowing U.S. economic growth means further monetary policy stimulus may be needed.

“There would appear -- all else being equal -- to be a case for further action,” Bernanke said on Friday in Boston.

Subdued U.S. inflation data published on Friday bolstered Bernanke’s case.

Consumer prices excluding food and energy rose just 0.8 percent in the year to September, the lowest since 1961 and a level some Fed officials believe heightens the risk of deflation -- a pernicious spiral of falling prices.

U.S. retail sales proved surprisingly strong last month, but that was not enough to offset the perception that economic growth is simply too slow to bring down the nation’s elevated jobless rate, currently at 9.6 percent.

General Electric Co, the largest U.S. conglomerate, posted a sharper-than-expected drop in revenue on slack demand for wind turbines, railroad locomotives and other heavy equipment, reflecting weakness in the economy.

The U.S. dollar recovered ground on Friday but remained near a 10-month low against a basket of other major currencies. Australia’s dollar surged above parity with the U.S. dollar for the first time since 1983.

As pressure on China to revalue mounted, the yuan ended at its highest closing level against the dollar since it was depegged from the greenback in June.

Investors now see a further round of U.S. monetary stimulus as likely at the Fed’s next policy meeting in early November.

A Reuters poll published on Thursday showed all 52 analysts surveyed expect a fresh round of bond buying, known in financial markets as ‘quantitative easing’. USN LINK

“It’s no longer a matter of if, but to what extent,” said Brian Levitt, economist at OppenheimerFunds. “The Fed will pursue quantitative easing with some flexibility. I’m not sure they even know yet.”

Writing by William Schomberg; additional reporting by Reuters reporters worldwide