Wednesday, 4 June 2008

Bernanke concerned about US dollar, China wants to fix it

The Federal Reserve has finally expressed concern about the weakness of the US dollar. Bloomberg reports:

Federal Reserve Chairman Ben S. Bernanke threw the weight of the central bank behind Treasury Secretary Henry Paulson's efforts to strengthen the dollar after its 10 percent drop over the past year.

Bernanke said in a speech yesterday the Fed is "attentive" to the currency and will guard against a jump in inflation expectations. Paulson a day before reiterated that he "very strongly" favors a "strong" dollar.

The Fed chief's signal that he's done for now with lowering interest rates may help stabilize the dollar after 3.25 percentage points of rate cuts since September reduced returns on U.S. investments and demand for the currency...

Bernanke yesterday omitted previous comments on how the dollar helps U.S. exports and stressed instead that it contributes to an "unwelcome rise" in inflation. Speaking to a conference in Barcelona, he said Fed and Treasury officials are collaborating to "carefully monitor" exchange rates.

However, averting a US dollar crisis may require a more permanent solution. From Reuters yesterday:

A major dollar crisis could come within five years and China is discussing reforms to the global monetary system to protect its $1.6 trillion reserves pile, says Nobel Prize-winning economist Robert Mundell.

Mundell, who has regular contacts with Beijing officials, said they are considering proposing ways to to fix major currencies including the dollar and the euro, in a system similar to the one which operated under the Bretton Woods agreement from the end of World War Two until the 1970s.

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