Bernanke and the dollar

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The last thing the Fed, or any central bank should do, is comment on currencies. On Tuesday, Ben Bernanke, the US Federal Reserve chairman, made it clear that he favoured a stronger dollar – or at least not a weaker one – to help stem inflation. Given that the Fed rarely expresses a view on foreign exchange markets (currency management lies with the Treasury), Mr Bernanke’s words sent the dollar higher.

Central bankers should keep schtum for two reasons. First, they have as little chance of influencing currencies as the finance ministers who comment regularly. Traders these days barely look up from their screens at passing G7 communiqués. Sure, central bankers control interest rates, but nobody for a moment thinks that monetary policy targets exchange rates. And if the dollar starts to fall again, the Fed risks looking impotent – strength and credibility is the lifeblood of central banks.

The second problem is one of signalling. Mr Bernanke’s comments were widely interpreted as meaning there would be no further cuts in interest rates.

Conversely, central bankers calling for a weaker currency would be thought to be biased towards looser monetary policy. That risks simplifying the role of many central banks. Are markets, for example, now to assume that the Fed cares more about inflation than it does growth, thereby shifting the focus of its own dual mandate?

In addition, if Mr Bernanke offers a view on the dollar once, currency traders and policy watchers will want him to do so again. Worse, an absence of comments could make markets jittery. Louder central bank jaw-boning would further reduce the attention given to government views on currencies.

But only finance ministers actually have the power to intervene directly in the currency markets, however ineffective they tend to be. Perhaps to grab their mojo back from Mr Bernanke, they may feel tempted to do just that at next week’s G7 meeting.

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