Bernanke tries to talk the dollar back up

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Bernanke Says Fed Will Keep Eye on Sliding Dollar

By Jeannine Aversa
Associated Press
via Yahoo News
Monday, November 16, 2009

http://news.yahoo.com/s/ap/20091116/ap_on_bi_ge/us_bernanke

WASHINGTON -- Federal Reserve Chairman Ben Bernanke on Monday said the central bank will monitor the sliding U.S. dollar but pledged anew to keep interest rates at record-lows to nurture the economic recovery.

In remarks to the Economic Club of New York, Bernanke engaged in a delicate dance.

He made clear that Fed policymakers will keep rates at super-low levels. Yet through his words, Bernanke is also trying to bolster confidence in the dollar without actually raising rates, a move that could short-circuit the fragile recovery.

Low interest rates could put additional downward pressure on the dollar. And economists say a free-fall in the value of the dollar, while unlikely, can't be entirely dismissed. Still, low rates are needed to encourage consumers and businesses to spend more and fuel the economic rebound.

That's the dilemma for the Fed.

"We are attentive to the implications of changes in the value of the dollar," Bernanke said in rare remarks about the greenback. The Fed, he said, will continue to "monitor these developments closely."

Commodity prices -- such as oil -- have risen lately. That pickup likely reflects a revival in global economic activity and the recent depreciation of the dollar, Bernanke said. Despite "cross-currents" in the outlook for prices, the Fed chief predicted inflation probably will remain "subdued for some time."

That gives the Fed leeway to hold rates at record-low levels for an "extended period," he said, repeating a pledge made at the Fed's meeting earlier this month.

The sagging dollar has helped sales of U.S. exports because it makes those goods less expensive on foreign markets. But if the dollar were to plunge in value, it could ignite a new economic crisis in the U.S., prompting investors to dump their dollar holdings and driving up domestic interest rates.

"Bernanke is trying to use words -- not interest rates -- to prevent the dollar from going even lower," said Jay Bryson, global economist with Wells Fargo Securities.

Bryson and other analysts said they didn't think Bernanke was signaling that the Fed would join with central bankers in other countries to intervene in markets to strengthen the dollar. But that is an option for the Fed if the dollar were to start plunging.

The dollar has posted double-digit declines in 2009 against other major currencies since its value peaked against various foreign currencies in March and April. The dollar is off 19.5 percent against the Canadian dollar since March 9, while it's down 16.3 percent after hitting a high against the euro March 4. The dollar has lost 11.4 percent of its value since peaking against the Japanese yen on April 6.

The ICE Dollar Index, which measures the value of the dollar against a basket of foreign currencies, has fallen 15.9 percent since reaching a high on March 4.

China, the No. 1 lender to the United States, which has racked up a record budget deficit, has expressed concerns that the falling dollar threatens the value of its existing U.S. holdings. China also is the third-largest market for American goods, accounting for 6 percent of U.S. exports through September.

In recent weeks, some Asian countries have been intervening to try to keep their currencies from rising further against the dollar. They are feeling pressure because of China's tight link to the dollar which has meant as the dollar has tumbled since March, China's currency has fallen in relation to their currencies, giving China a competitive advantage.

Economists expect the Fed will hold rates near zero at its next meeting on Dec. 15-16 and into part of next year to help the recovery gain traction.

Bernanke predicted the economy should continue to grow next year, but he warned of "important headwinds" that will restrain the recovery, including a weak job market and tight credit for small businesses and households.

Those forces "likely will prevent the expansion from being as robust as we would hope," he said.

After a record four straight losing quarters, the economy started to grow again in the July-September period at a pace of 3.5 percent. Government-supported spending on homes and cars drove the rebound, raising questions about the staying power of the recovery once that assistance fades.

Bernanke said the rebound reflected more than "purely temporary factors" and predicted growth would continue into next year.

But he cautioned there is uncertainty about how the economy will evolve next year, and warned that "future setbacks are possible."

One of the biggest threats hanging over the recovery is rising unemployment. The nation's unemployment rate bolted to 10.2 percent in October. It marked just the second time in the post-World War II period that the jobless rate topped 10 percent.

Some economists think it could rise as high as 11 percent by the middle of next year before starting to gradually drift down.

Bernanke said the unemployment rate "likely will decline only slowly" if economic growth remains "moderate" as he expects.

Because jobs are likely to remain scarce for some time, consumers -- critical shapers of overall economic activity -- will be cautious about spending, Bernanke said.

Banks dealing with the fallout from soured commercial real estate loans also could slow progress on efforts to get credit flowing more freely again, the Fed chief said. And credit difficulties will limit the ability of some businesses to expand and hire.

"Overall a number of factors suggest that employment gains may be modest during the early stages of the expansion," Bernanke said.

By holding rates at record lows, the Fed risks creating a speculative bubble. But Bernanke, fielding questions after his speech, said he didn't see any bubbles forming at this point in the United States.

"It's extraordinarily difficult to tell" if a bubble is forming, he acknowledged. "It's not obvious to me in any case."

If a bubble did form, "we use our interest rate tools to try to meet our mandate -- full employment and price stability," he said.

The Fed's decision to hold interest rates at exceptionally low levels after the 2001 recession was blamed for feeding the housing bubble. When the housing boom went bust in late 2006 the economy soon followed.

Bernanke said the Fed's commitment to the underlying strengths of the U.S. economy, "will help ensure that the dollar is strong and a source of global financial stability."

During the question and answer session, the Fed chief also urged Congress and the White House to trim the record $1.42 trillion budget deficit, another force depressing the value of the dollar.

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