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Subject Bernanke reassures markets on dollar
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Original Message By Krishna Guha in Washington

Published: November 16 2009 18:53 | Last updated: November 16 2009 18:53

The Federal Reserve is monitoring currency markets “closely” and will conduct policy in a way that will “help ensure that the dollar is strong”, Ben Bernanke said on Monday in rare comments on the US currency.

In remarks apparently aimed at reassuring markets and foreign governments that the central bank is not indifferent to the fate of the US currency, the Fed chairman said “we are attentive to the implications of changes in the value of the dollar”. He added that the Fed “will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability” – and that in doing so it would support the value of the currency.

The dollar briefly jumped on his remarks, but then gave up some gains as traders questioned whether Mr Bernanke was prepared to go beyond talking in support of the currency. For the Fed chairman to comment on currencies at all is highly unusual. By convention, the US Treasury Secretary is the sole US official who talks about the dollar.

Mr Bernanke’s comments came amid growing international unease about the weakness in the dollar, the global reserve currency, which forms a backdrop to President Barack Obama’s tour of Asia. Liu Mingkang, China’s banking regulator, criticised the Fed at the weekend for fuelling the dollar carry trade in which investors borrow dollars at ultra-low interest rates and invest in higher-yielding assets abroad, creating the risk of new asset price bubbles.

The Fed chairman also indicated that the US central bank would not ignore the impact of rising commodity prices when evaluating the outlook for inflation. He said he would not rule out using interest rates to combat new asset price bubbles, even though he did not see obvious mispricing in the US at this stage.

Mr Bernanke reiterated that the Fed still expects to keep rates near zero for an “extended period” based on its forecast of “low levels of resource utilisation, subdued inflation trends and stable inflation expectations.” But he said significant changes in these economic conditions or the general outlook “would change the outlook for policy as well.”

The Fed chairman characterised the recent decline in the dollar as the unwinding of the gains made at the peak of the crisis when investors worldwide took refuge in the US currency, but said the Fed was watching developments closely – and cited the dollar as part of the inflation outlook.

“Many factors affect inflation, including slack in resource utilisation, inflation expectations, exchange rates and the prices of oil and other commodities,” Mr Bernanke said. Characterising inflation expectations as “stable” he said “notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time”.

Mr Bernanke said he expected growth would gradually gain traction over the coming year but would be slowed by “important headwinds” including “constrained bank lending and a weak job market”.

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