Further Thoughts on Bernanke's Dollar Remarks

June 4, 2008

My initial belief that Bernanke’s remarks had been cleared with the Treasury was confirmed by the Wall Street Journal today, which cited a “person familiar with the matter.” That person may actually have been either Bernanke or Treasury Secretary Paulson. The citation reads like a plant from officials. On reflection, I’d wager that the impetus for having Bernanke, not Paulson, comment so extensively on the dollar came from the Treasury Secretary. Treasury will continue to be the architect of U.S. foreign exchange policy, and the habit of speaking sparingly and infrequently on the subject has served everybody well. Bernanke’s in-depth remarks will go down in history as a rare and isolated instance when markets were allowed a better-defined glimpse of official thinking on the dollar. Had the comments come from Treasury, an important and perhaps regrettable precedent would have been established for future instances when the dollar moves into the spotlight of world financial markets.

In a typical variation on the talk-is-cheap theme, the WSJ expresses doubt that Bernanke will not be able to back up his words with actions, either by raising interest rates or intervening in the currency marketplace. That worry appears overstated to me. For one thing, action may not be necessary. Recent European and U.S. data had already helped firm up the dollar, which has stayed comfortably off its cyclical lows for more than a month. More importantly as explained in Krishna Guha’s news analysis in today’s Financial Times, the Fed came out of the closet so to speak because it would be easier now to back up words with deeds by acting in support of the dollar. Monetary policy risks are shifting away from deficient growth and toward excessive inflation. Although Bernanke did not hint that interest rates might be hiked very soon, he appears equally unprepared to cut rates again, and if the dollar were to plunge or if a new wave of upward oil price pressure were to lift expected inflation, he would have fewer qualms against raising interest rates.

It has been said that a 7-1/2 year-old administration that never sold or bought dollars in foreign exchange market intervention must be so ideologically opposed to the idea that it will not use that policy tool under any circumstances. “Never” is a loaded word in foreign exchange. Paulson has escalated dollar jawboning, which already demonstrates a greater attentiveness to currency market developments. There is a time and place for everything. I sense lessening U.S. resistance to using intervention if the right conditions present themeselves. Bernanke’s remarks reflect greater future flexibility in monetary and dollar policy.



One Response to “Further Thoughts on Bernanke's Dollar Remarks”

  1. jpaz says:

    Great insight!