Bernanke: Don't Expect Declining Dollar to Prompt U.S. Policy Changes

We have noted that, in recent weeks, Fed officials have not been shy about commenting about the dollar, even when unsolicited by reporters.

The first comments from Bernanke on Monday pointed to this as well. Bernanke said that the Fed is keeping an eye on the dollar -- though apparently not sufficiently to mention it in the recent FOMC statement. He also said that the Fed's policy will help ensure that the "dollar is strong," though it is not clear what exactly that means.

Still, the dollar has jumped on the news after the euro ran out steam earlier in front of the $1.50 level. On other issues, Bernanke has not broken any new ground. At the end of last week, the euro found a base near $1.4825. That support is key. A break would suggest a move back toward $1.4625.

If officials do not like foreign exchange volatility, Fed Chairman Bernanke may not be pleased with the market response. The mention of the dollar, which traditionally is a topic the Fed defers to the Treasury, prompted interbank and option dealers to cover short dollar positions, even though no new ground was covered or specifics cited. However, cooler heads quickly prevailed and the dollar returned to pre-Bernanke levels. It is clear from the Chairman's remarks that the dollar's decline is not of sufficient proportions to prompt a change in the US monetary policy. Bernanke continues to envision that the economic conditions are such that rates will be able to remain low for an extended period. Like other officials we have spoken with, Bernanke frames the recent dollar decline in the context of the dollar's rally in H2 08 and Q1 09.

The intraday volatility not withstanding, Bernanke's comments do not present a significant obstacle to dollar bears. Sterling is made new highs for the session post Bernanke's prepared remarks. The dollar looks poised to challenge the session low against the Japanese yen.

Meanwhile, the equity market and debt market continues to rally.

Disclosure: No positions

Comments

[j-dub:]

Anyone here ever watch poker on ESPN?
Bernanke just declared he is "ALL IN!!!"

The problem is, with the exception of the clueless few traders at the table that panicked after the "ALL IN," and folded, the rest quickly figured out that he's holding 2, 7 offsuit and called him.

OOPS

Nov 16 09:45 PM