NEW YORK (Reuters) - Wall Street loyalties are always fickle, but with a 13 percent decline in the dollar in the last year, foreign exchange analysts say Federal Reserve Chairman Ben Bernanke’s hard-won credibility is in tatters.
Problems in the credit market, many of them stemming from defaulting mortgages in a U.S. housing market slump, have hit other asset classes like stocks, leaving investors nervous about the economy even as prices appear to be moving higher.
Indeed, Bernanke clearly indicated in recent testimony to Congress that growth was the bigger risk to the U.S. economy and inflation secondary, with the end result that confidence in U.S. assets is declining and so is demand for the dollars to buy them.
“I am disappointed,” said Michael Woolfolk, currency strategist at the Bank of New York Mellon. “Bernanke had an opportunity to manage expectations on inflation and failed to take the challenge at his congressional testimony last week. He is rapidly losing the inflation-fighting credentials he won last year.”
Taking up the chair of the U.S. central bank in January 2006, Bernanke had continued the string of 14 U.S. benchmark rate hikes begun under his predecessor, Alan Greenspan, with three more. Investors across the board were happy with his commitment to fighting inflation.
So much so that by the end of his first year in office, he was largely forgiven for a few gaffes such as saying the United States could reinflate the economy by printing money or comments to a reporter at a social gathering that soon found their way into the public domain.
But the economy in February 2007 largely seemed to be heading for a soft landing, with housing slowing but not collapsing and consumer spending stable.
Fast-forward to February 2008, and few are willing to back him.
Bernanke’s Fed has cut the benchmark U.S. interest rate by 225 basis points since September 2007, with one particularly sharp 75-basis-point cut in January a day after equity markets outside the United States dropped unchecked.
Most of the dollar’s declines since Bernanke took over have been in the last year, with the dollar index, a measure of the dollar against a basket of currencies, dropping around 13.2 percent. The dollar’s total decline since the day before Bernanke was sworn in is 18 percent.
At the same time, euro/dollar one-month volatility has climbed back to 9.9 percent from the 5.95 percent reading a year ago, according to Reuters volatility data. That’s close to the 10.22 percent on January 31, 2006, the day Bernanke was sworn in.
Dollar/yen one-month volatility was at 13.6 percent on Thursday compared with 9.32 percent just before Bernanke took up the post.
Volatility tends to rise when the market is expected to reach new highs or lows, suggesting to some investors that Bernanke’s inflation-fighting credentials and the outlook for interest rates will not lead to a stable currency.
Bernanke “has sacrificed the dollar in an attempt to save jobs and U.S. business,” said Craig Russell, Beijing-based chief market strategist at Saxo Bank, China. “He had to do something, but at the same time he is only putting off the crisis. We will face tight credit for a decade and we will have stagflation.”
Like Woolfolk, Russell had applauded Bernanke’s performance a year ago.
To be fair to Bernanke, filling the shoes of Greenspan, who presided over the Fed during the longest economic expansion in U.S. history, was always going to be a tough proposition. Close scrutiny was guaranteed, and critics were quick to harp on any mistakes.
The dollar was also already in a powerful downdraft long before Greenspan left office, falling 25 percent from its peak in July 2001 through to the end of Greenspan’s tenure in 2006.
Which may mean Bernanke can still win back his detractors.
“We are not over the problem yet,” said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. “Three or four months down the road when we can see the recovery, he will be hailed as a hero -- but that is in the future.”
Reporting by Nick Olivari; Editing by Jonathan Oatis
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