Federal Reserve 'attentive' to weak dollar


Posted at Jun 03 2008 10:13 PM | Updated as of Jun 04 2008 06:13 AM

Agence France-Presse

WASHINGTON - Federal Reserve chairman Ben Bernanke said Tuesday the central bank is "attentive" to the sagging dollar and would look at steps "to guard against risks" to inflation from a weak currency.

Bernanke, speaking via satellite to a monetary conference in Barcelona, Spain, offered a mixed assessment of US economic conditions, highlighting concerns about inflation.

"The challenges that out economy has faced over the past year or so have generated some downward pressure on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation," he said, according to the text of the remarks released in Washington.

"We are attentive to the implications of the changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations."

The Fed's dual mandate is to maintain price stability and promote maximum employment in the US economy.

The comments by Bernanke were his strongest on exchange rates and the potential impact on inflation.

He noted that "in collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets."

The dollar has been slumping against other major currencies, especially the euro, as the Fed has slashed its base rate from 5.25 percent last September to 2.0 percent.

While Bernanke made no specific comment on the Fed's next move, he suggested there would be no immediate interest rate cuts: "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."

On the overall US economic outlook, Bernanke said activity remains sluggish but is poised to rebound. However he said the rebound remains dependent on a recovery in the troubled housing market and some stability in energy prices.

"Activity during the current quarter is also likely to be relatively weak," he said.

"We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad."

He added that the Fed sees growth "picking up further in 2009," but cautioned that "until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside. Recent increases in oil prices pose additional downside risks to growth."