Published: Monday, 16 Nov 2009 | 1:25 PM ET

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The U.S. central bank is monitoring the declining value of the dollar closely as part of its commitment to both jobs growth and price stability, Federal Reserve Chairman Ben Bernanke said Monday.

AP

In a rare commentary on the value of the dollar, Bernanke drew a link between its current weakness and inflation risks.

Bernanke also said that regulatory reform has to address the too-big-to-fail issue, and it must be possible for financial firms to fail without dragging the broader system with them.

Instead, systemically important banks should be closely supervised and there should be an alternative to government bailouts.

However, he said there were other factors helping to restrain inflation in the United States, and he repeated that the Fed is likely to keep interest rates exceptionally low for "an extended period."

"We are attentive to implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," he told the Economic Club of New York.

The central bank would need to raise rates to lift the dollar's value, but that could harm economic recovery.

Fed officials usually defer to the Treasury secretary on issues relating to the dollar's value, and the greenback pared losses against the yen and gained against the euro on Bernanke's remarks.

"Bernanke finally is doing what any self respecting central banker does, admit that the weakness of the reserve currency of the world matters," said Peter Boockvar, an equity strategist at Miller Tabak and Co in New York.

Bernanke noted that the currency's recent decline had been a factor helping to push commodity prices higher. However, he also said a high level of slack in the economy and stable longer-run inflation expectations should keep price pressures under wraps.

"On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time," he said.

Bernanke said the Fed would closely monitor inflation expectations, which can be an important early warning of actual inflation.

The dollar has dropped about 16 percent against a basket of currencies since mid-March, when economic worries were running high, sending investors in search of safe havens.

"These safe haven flows have abated, and the dollar has accordingly retraced its gains," Bernanke said.

Policy Pledge

The dollar's decline has sparked concern from Paris to Beijing. In Europe, policymakers worry that the strength of the euro is harming economic recovery prospects. In China, the dollar's decline has eroded the value of the government's massive currency reserves.

Chinese banking regulator Liu Mingkang said Sunday low U.S. interest rates and a weak dollar posed a "new systemic risk" because they were fueling speculation in overseas asset markets, a particularly pointed criticism with U.S. President Barack Obama visiting China.

The Fed slashed U.S. short-term interest rates to near zero in December and has pledged to keep them ultra low for an "extended period" to support a weak recovery from the deepest U.S. recession since the Great Depression.

Bernanke renewed that pledge but added "significant changes" in economic conditions or the outlook could change the outlook for policy as well. He said that the country's high twin deficits could not be maintained, and there is a need to find a sustainable fiscal route.

Financial conditions have improved since a year ago, but major challenges remain and future setbacks are possible, Bernanke said. Tight bank credit and high unemployment are the chief headwinds facing the economy, he said.

While there is early evidence of an economic recovery, how it will proceed once government stimulus measures dry up is uncertain, he said, adding that sharp gains in business productivity are unlikely to be sustainable.

"My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely," he said.

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