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Fed chairman seeks to reassure market on value of the dollar

Text by News Wires

Latest update : 2009-11-17

Federal Reserve chairman Ben Bernanke made a rare intervention into the currency markets Monday to speak about the dollars sliding value. Bernanke said that the Reserve is striving for a strong dollar to ensure financial stability.

AFP - The Federal Reserve is striving for a strong dollar to ensure financial stability, chairman Ben Bernanke said Monday in the face of growing complaints by China and others about the sliding greenback.

Bernanke, in a New York speech, said the central bank was closely monitoring exchange rates with the dollar having lost its gains from safe haven flows during the height of the financial crisis.

"We are attentive to the 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," the Federal Reserve chief told the Economic Club of New York.

"Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability."

Bernanke's comments come with the greenback under heavy pressure in foreign exchange markets, raising complaints from around the globe, including China, about the weak US currency about impacts on various economies.

Because of the Fed's near-zero interest rate policy, the dollar is being used by investors for so-called carry trades in which they borrow greenbacks at low rates to invest in higher-yielding assets such as commodities and bonds of other governments. This increases pressure on the dollar.

Bernanke's comments caused a brief jump in the value of the greenback against the euro, which has been rising the most against the dollar.

The euro fell from 1.4971 dollars ahead of the speech to as low as 1.4881 dollars, but then rebounded above 1.50 dollars later in the day before settling at 1.4972 dollars at 2200 GMT.

Analysts said Bernanke's comments would do little to help boost the dollar unless the talk is backed by action on interest rates.

"The forex markets certainly took note of chairman Bernanke's dollar comments," said Vassili Serebriakov, currency strategist at Wells Fargo.

"Yet, in the absence of any notable shift on the policy front we doubt that 'official' jawboning can do much to reverse the current weak dollar trend."

Joseph Brusuelas at Moody's Economy.com said Bernanke's comments were carefully worded to avoid any promise of direct support for the greenback.

"Bernanke stopped short of rhetorically intervening in foreign exchange markets," Brusuelas said.

"He said the Fed's dual objectives of full employment and price stability, together with the underlying strength of the economy, will bolster the dollar and promote financial stability. Without stronger language from the central bank, the door may be open to further dollar depreciation."

On Sunday, China's chief banking regulator warned that persistently low US interest rates and a declining dollar were seriously affecting asset prices and threatening the global economic recovery.

China Banking Regulatory Commission Chairman Liu Mingkang told a finance forum in Beijing that Washington's promise to keep interest rates low for an extended period was encouraging a dollar "carry trade" and fueling massive speculation.

The dollar's weakness is bad news for many Asian exporters, which are struggling to maintain their competitiveness, particularly against Chinese rivals benefiting from the relative stability of the yuan.

European officials have also complained about the weakening dollar.

There is concern in Europe that Washington is seeking a short-term boost to its own exports and a long-term reduction in the value of government and private debts, much of which is held in China.

The European Commission contends that appreciation in euro value against the dollar of 10 percent in real terms would see exports fall by around 2.5 percent within two years.

Eurogroup chief Jean-Claude Juncker warned last month that "if the euro's direction were to continue to move along the lines of recent weeks, there is a risk... that it could slow economic recovery in Europe."

Date created : 2009-11-17

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