Bernanke's Hints at Stronger Dollar: Meant to Cool Oil Prices?

Fed chief Bernanke’s words today are likely to support the US dollar in the short to medium-term.

Speaking via satellite at an International Monetary Conference in Spain, Bernanke said that the Fed is “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations”, since the dollar has lost much of its value against other major currencies like the Euro. It is very rare for Bernanke to talk specifically about the dollar, so his voicing out of the US currency has definitely got everyone’s attention.

He acknowledged that the weakening dollar has had an effect on oil prices, and that much of the dollar’s fall is erasing its pre-2002 strength. The US dollar shot up sharply versus the Euro and Swiss franc, and is looking poised to attract bidding interest along the way.

Bernanke also mentioned that downside risks to the US economy will remain until there is clearer signs stabilization of house prices. He also said what many of us already know, which is the reluctance of Americans to spend, saying that consumers continue to face “significant headwinds” although consumer spending has thus far held up a bit better than expected. So if you want to help the economy, spend, but not overspend.

Another boost to the US dollar comes from Bernanke’s suggestion that the Fed will keep interest rates unchanged. He said, “For now, policy seems well positioned to promote moderate growth and price stability over time. We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.” He said the Fed will pay “close attention” to commodity prices that are driving up inflation.

Australia Leaves Rate Unchanged

The Australian dollar went higher against the US dollar to above 0.9600 but then gave up its gains after the Reserve Bank of Australia left interest rates unchanged today. Data released today showed the current account deficit for the March quarter rose to a record A$19.5 billion as bad weather in Queensland dampened the nation’s exports. One positive thing is that home-building approvals unexpectedly rose 7.8% in April for the first time in five months.

Forex Trading

EUR/USD has broken below the trendline established since February this year, and has hit an intraday low around 1.5435. Next bear target is possibly 1.5390-1.5400. USD/CHF has found support on its up trendline, and rallied to a session high of 1.0490. Topside targets are 1.0530, 1.0590-1.0610.

Wednesday:

Australia GDP 0130 GMT

ECB’s Trichet speaks 0730 GMT

Eurozone PMI services 0800 GMT

UK PMI services 0830 GMT

Eurozone retail sales 0900 GMT

US MBA mortgage applications 1100 GMT

US ADP employment change 1215 GMT

US ISM non-manufacturing 1400 GMT

Fed’s Bernanke speak on economic challenges 1845 GMT

Comments

[Philly Jim:]

It's always a pleasure to read Grace's articles. ;)

My question to the Fed is: Do you still think you are in the driver's seat of this global economy?

My question to everyone else is: Is the Fed in control of the dollar's value as much as they think they are and can the ECB,BOE and BOJ swim upstream with the FED on this game plan to boost the ailing dollar?

Just when the emerging markets are beginning to enjoy the fruits of their labor and increased purchasing power, they are being asked to sacrifice and participate in boosting the dollar in order to avoid further inflationary pressures and a potential global economic meltdown if the world does not quickly deal with commodity prices and the falling dollar.

One possibility could be for another regional currency to emerge or even several (Africa & ASEAN) in order to stabilize markets,currencies and commodity costs and in-line with the rapid evolution towards a single world currency by 2030.

Did the Fed plan for 2 billion consumers to suddenly come into the picture or 2 billion competitors should I say? The only ones to benefit in the short-term in this global mess are multi-national corporations who are loving it till the last drop of fresh water. The West needs to adapt quickly; lose the fat and get in shape or perish in this red hot global economy! Central banks are not always going to be in control as mega corporations and sovereign wealth funds begin to have more global power than they do.

2008 Jun 03 01:18 PM

[Edward Janeck:]

Talking up the dollar is nothing but short term. Long-term the dollar will fall because of the current account deficit. The government has had a strong dollar policy for the last 7 years. No really. So now that Bernanke is talking up the dollar, because he is the Fed chief, it is going to change everything. I don't buy it.
theinvestingspeculator...

2008 Jun 03 02:03 PM

[Donald Johnson:]

As I've blogged, the government can manipulate prices at will, and the consuming countries are jawboning and taking other actions that have the institutional speculators rethinking their positions, as we predicted.

2008 Jun 03 03:33 PM

[Sober Realist:]

Today Bernanke answered the very question that the title of your asks:Bernanke's Hints at Stronger Dollar: Meant to Cool Oil Prices?

Bernanke, in a question-and-answer period, said soaring oil costs are
more the result of supply and demand than the weaker dollar. ''The
effect of the dollar on commodity prices is relatively modest,'' he
said. Supply and demand conditions are ''by far the strongest and most
important factor.''

business.smh.com.au/be......

2008 Jun 03 06:19 PM

[gatekeeper:]

So which is closest to the truth?
___ “A weak US dollar is responsible for high oil prices.”
___ “High oil prices are responsible for a weak US dollar.”

2008 Jun 03 09:50 PM

[buyitcheap:]

I agree with speculator, we didn't see sucha big run until oil hit $80 - I'd bet (if I had time to do the analysis) that 1/4 of the $128 price is due to a decline in the $USD. Small comfort as that still leaves us

2008 Jun 04 07:32 AM

[buyitcheap:]

pardon the caffeine induced premature post....

that still leaves us with nearly $100 oil.

2008 Jun 04 07:33 AM

[Greg Pinelli:]

This entire "institutional speculation"scenario is a dodge for not facing up to the geology of oil/gas and the much more difficult lifting that's involved in accounting for that..instead of writing a few irrelevant blogs or having a Congressional hearing to tame the "greedy."
Bernanke can jawbone all he wants...but its peoples pocketbooks that will bring down the price of oil for a few months..not his mouth...His cooments are good for about a weeks worth of investor action and then everyone realizes he has to provide huge liquidity to the markets or all be sitting here wondering if our bank will reopen today.

2008 Jun 04 11:14 AM