Fed to stop lowering interest rates to stabilize dollar

Federal Reserve Chairman Ben S. Bernanke threw the weight of the central bank behind Treasury Secretary Henry Paulson's efforts to strengthen the dollar after its 10 percent drop over the past year.

Photo: Fed to stop lowering interest rates to stabilize dollar

Bernanke said in a speech yesterday the Fed is “attentive” to the currency and will guard against a jump in inflation expectations. Paulson a day before reiterated that he “very strongly” favors a “strong” dollar.

The Fed chief's signal that he's done for now with lowering interest rates may help stabilize the dollar after 3.25 percentage points of rate cuts since September reduced returns on U.S. investments and demand for the currency. Paulson began strengthening the U.S. stance in November by stating the dollar would reflect solid long-term economic fundamentals.

“The Fed cannot ease further if the dollar is now a concern,” said Stephen Jen, chief currency economist at Morgan Stanley in London, who used to work at the Fed and the International Monetary Fund. "This shift in rhetoric is one more reason to believe that the dollar has bottomed."

A measure of the dollar against the currencies of major U.S. trading partners has fallen in five of the past six years, reaching a record low of 69.26 in March. The Fed's trade- weighted major currency dollar index traded at 70.78 late yesterday.

Bernanke yesterday omitted previous comments on how the dollar helps U.S. exports and stressed instead that it contributes to an "unwelcome rise" in inflation. Speaking to a conference in Barcelona, he said Fed and Treasury officials are collaborating to “carefully monitor” exchange rates, Bloomberg reports.

The dollar extended its gains against the yen in Asian trade on Wednesday after Federal Reserve chairman Ben Bernanke said a weaker greenback was adding to US inflation pressures, dealers said.

They said the market had taken the rare remarks by the Fed chief on currencies as a signal that the US central bank will not be in a hurry to cut interest rates again as such a move would be likely to weigh on the dollar.

The dollar firmed to 105.21 yen in Tokyo afternoon trade from 105.08 in New York late Tuesday.

The euro was little changed at 1.5443 dollars but edged up to 162.40 yen from 162.36, the AFP reports.

Bernanke told a conference in Barcelona, Spain that downward pressures on the dollar "have contributed to the unwelcome rise in import prices and consumer price inflation."

He said the Fed was "attentive to the implications of changes in the value of the dollar for inflation and inflation expectations."

"Comments on currencies from the Fed chairman are a very rare thing and surely had a supportive effect on the dollar," Tsutomu Soma, a senior trader at Okasan Securities, told Dow Jones Newswires.

Source: agencies