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Bernanke Supports The Dollar But Will It Last?

Tuesday, 3 Jun 2008 | 3:37 PM ET

Fed ChairmanBen Bernanke threw his support behind the dollarand even acknowledged some ownership of the greenback. This is important because the Fed traditionally does not talk about the dollar, leaving that task strictly to Treasury.

But it's not really that odd considering it's been the Fed's rate cutting that some traders say is in part to blame for dollar weakness, and the resulting rise in commodities prices and inflation.

In remarks to the International Monetary Conference, he said its weakness has contributed to the "unwelcome rise in import prices and consumer price inflation." Sound familiar?

He also signaled that the Fed's current rate stance is the right one. Those comments simply confirmed the market's current view.

Interestingly, he said the Fed is "attentive to the implications of 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." He also said the Fed is continuing to carefully monitor developments in currency markets along with colleagues at the Treasury.

Some traders say Bernanke's comments coincide with what appears to already be an upswing in the currency. Even with the volatile trading in stocks and bonds today, the dollar has held onto its early morning move higher.

But whether that sticks has yet to be seen.

Boris Schlossberg, senior currency strategist at DailyFx.com,said Bernanke' s comments brought on a "sentiment burst," driving the dollar higher today. But he said whether this move higher lasts will depend in part on Friday's jobs report.

"The question is will he be able to maintain a stationary monetary policy if the labor situation deteriorates any further," Schlossberg said.

"This is really what the Fed wants to do, which is to keep rates at this level, because they are feeling tremendous amounts of inflationary pressure," he said.

Miller Tabak's Tony Crescenzi told me yesterday that the one surprise in Bernanke's speech today could be a remark that would strengthen the dollar. Well, he was right. Today, he wrote that Bernanke's comments are as strong as he could give because of the U.S. policy that only the Treasury Secretary speaks on the dollar. He said Bernanke's comments are a follow up to the communiqué delivered after the April 11 G7 meeting.

"The depth to which Bernanke discussed the dollar is extraordinary for a Fed chairman and the use of the expression "we are attentive" was a direct salvo at speculators in the foreign exchange market. Moreover, in saying that the Fed would "formulate policy to guard against risks," and emphasizing "the risk of an erosion in longer-term inflation expectations," Bernanke put additional backbone behind his defense of the dollar," Crescenzi wrote. (Check out his guest blog on CNBC.com)

Questions? Comments? marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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