Ben Bernanke: Turning a Blind Eye to Weak US Data?

On Monday evening, Bernanke reiterated the Federal Reserve’s commitment to contain inflation, driving the US dollar higher in what would otherwise have been a quiet Asian trading session. Over the past 24 hours,the US government has come out with all guns blazing as US Treasury Secretary Paulson, Federal Reserve Governors Geithner and Fisher have commented on the value of the US dollar. Their public agreement is a sign that the US Government wants the dollar rise and they are jawboning it at every opportunity.

With gasoline prices now above $4 a gallon across the nation, the central bank has made reducing inflationary pressures their number 1 priority. According to Ben Bernanke’s comments Monday evening (Full Speech), the FOMC will “strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.” Bernanke even went so far as to say that despite the fact that the unemployment rate jumped from 5 percent to 5.5 percent, which was very negative since it marked the largest monthly decline in over 20 years, the US economy has skirted a major decline.

In all likelihood, the central bank governor’s less bearish comments about the outlook US economy is an excuse to keep monetary policy unchanged as it is too early to decide whether the US economy has indeed averted a more serious slowdown. The jump in gas prices is a major risk to consumer spending and it remains to be seen whether that will have a more serious impact on the overall economy.

Since the economy is not strong enough to raise interest rates, the Federal Reserve and US Treasury hopes that an appreciation of the US dollar would help to curb inflation.
Continue reading

US Dollar Intervention: Is it Possible?

Is intervention in the US dollar possible?

Well anything is possible in this world, but despite jawboning by Bernanke and Paulson, I do not expect physical intervention in the dollar by the US government.

The last time that the Federal Reserve intervened in the currency markets was shortly after the launch of the Euro. At that time, the currency fell to a low of 84 cents, triggering panic for the European Central Bank. In response to the sharp sell-off in the EUR/USD, the ECB convinced the Fed to jointly intervene in the currency markets to buy euros and sell US dollars. Since there has been no intervention for more than 7 years, stepping into the markets would represent a dramatic policy shift for the US government. The reason why talk of intervention has resurfaced is because the US government may be running of options.

Typically, raising interest rates is the most effective way to curb inflation, but with the labor market deteriorating and high energy prices threatening consumer spending, the Federal Reserve is reluctant to raise interest rates. This leaves strengthening the dollar as one of the easiest and possibly the quickest way to bring down inflation. Although I do not expect the US government to do more than jawbone the dollar, their bias for where the dollar should head is now clear. In the past, the Federal Reserve wanted the dollar to fall to boost exports and growth, but they have now flipped their stance and instead they want the dollar to rise.

Federal Reserve Chairman Ben Bernanke first hinted that FX intervention is possible last week and today US Treasury Secretary Paulson said on CNBC that the US government is not ruling out intervention.

Continue reading