Enough is enough with the wimpy dollar, Fed chief says

The U.S. dollar has a new BFF: Federal Reserve Chairman Ben S. Bernanke.

And that revelation may be helping to drive oil down to a three-week low today.

In a speech, the Fed chief took the unusual step of declaring the central bank’s interest in "ensuring that the dollar remains a strong and stable currency."

His comments are helping to push the dollar up, albeit modestly, against the euro, the yen and other key currencies. And as the dollar appreciates, that’s negative for commodity prices, because it removes one incentive for higher prices of oil and other raw materials. They've risen in recent years partly because of the greenback's long slide: Most commodities are priced in dollars worldwide, so a weak buck means commodity producers -- and speculators -- have had more motivation to seek higher prices to offset the U.S. currency's devaluation.

Crude oil prices were down $3.06 to $124.70 a barrel at about 11:30 a.m. PDT, while the euro fell to $1.546, down from $1.555 on Monday and the lowest since May 15. (Not that any of this is helping the stock market today, which is broadly lower for a second day.)

Bernanke’s defense of the buck is unusual because currency issues normally are the U.S. Treasury’s concern, not the Fed’s. But the dollar’s decline is helping to stoke inflation in the U.S. by boosting prices of imported goods, and inflation is what the Fed is paid to worry about. (Never mind, for now, that a weak dollar is a boon to U.S. exporters.)

"The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation," Bernanke said in a speech via satellite to a financial conference in Spain.

"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations," he said.

Bernanke is "putting the market on notice that [the dollar] has begun to reach a level that may be uncomfortable" for the Fed, Goldman Sachs & Co. economists said in a note.

"Not since the days of the Louvre Accord more than 20 years ago has the Fed drawn an explicit line in the stand against the weakness of the dollar," said Michael Darda, economist at MKM Partners in Greenwich, Conn.

And what that also means, of course, is that the Fed is highly unlikely to cut interest rates further. Bernanke strongly hinted as much today: "For now, policy seems well-positioned to promote moderate growth and price stability over time," he said.

Photo: Fed Chairman Bernanke at a conference in May. Scott Olson/Getty Images

Comments

[Jim Girard]

This guy is full of it. Bernanke is in a corner. The U.S. is the largest debtor nation in the world. They want to monetize the debt by printing more and more money, therefore inflating themselves out of debt. Don't believe a word this academic says. The Fed is painted into a corner. The government wants to pay it's debts with cheaper dollars. That way when the baby boomers retire, the $2500 dollars they receive a month may pay for a tank full of gas and a twinkie and that's all. Bernanke is a stooge and nothing more.

[tiddle]

What can Bernanke do? With the housing slumping still, company profit sliding, and weak consumer confidence, he won't be able to raise interest rate to defend the dollar. His bluffing is only going to buy a little bit of time before oil and commodity prices like gold continue their climb.

While his intention is noble, Bernanke's declaration doesn't solve any of the underlying issues/problems one bit. US deficit is still sky high. Global demand for natural resources is still tight. US economy would still need another 1-1.5 year to wring itself out from the current dump. Meantime, traders take profit, and buy back in again in a short while. Same old, same old.