Ben Bernanke comments on the US dollar

Federal Reserve chairman Ben Bernanke, in a rare comment on the US dollar's value, on Monday acknowledged the currency's slump was causing some prices to rise, but said there other factors restraining inflation.

While showing he was not indifferent to the dollar's slide, Mr Bernanke said a tight credit and a weak job market would weigh on the economy's recovery and he repeated the Fed's pledge 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 policies to guard against risks to our dual mandate to foster both maximum employment and price stability." Mr Bernanke said the central bank's commitment to its dual objectives, along with the strength of the US economy, would help ensure that the dollar was strong and a source of global financial stability.

Some investors are thinking that Mr Bernanke's comments will not change the current down trend of the green back. His pledge to keep rates low for an extended period makes sure that the dollar will not rally. His remarks that a weak dollar will be an issue once this leads to inflation are nothing to be taken into account right now. (He is currently still very busy to fight deflation).

The dollar has lost 16 per cent of its value against a basket of currencies and 20 per cent against the euro since mid-March, when fears about recession was at its peak, prompting investors to seek refuge in the "safe haven" currency. The Fed reduced its interest rates to virtually zero in December 2008 and pledged to keep it there for an "extended period" to support the economy.

Ben Bernanke reiterated that commitment, but warned that "significant changes", conditions or a different outlook could also affect the prospects of monetary policy. I interpret the speech of Mr Bernanke as an indication to the market that the Fed might raise interest rates quickly when a sign of sustained recovery in the US economy appears.

In addition, his commentary on the weakness of the dollar is very unusual; this cache may be a willingness of US authorities to support it either by intervening directly on the foreign exchange market as the Swiss National Bank did or in the form of verbal intervention as the Bank of Canada or the Bank of England did.

The EUR/USD is currently stuck between 1.4800 - 1.5100. However, in view of the above statements, I would not be surprised that the EUR/USD pair breaks the 1.4800 support to test lower levels of 1.4300 by the end of the year.

Upcoming FX key events

Key economic data next week include CPI inflation for most of the major economies, as well as Q3 GDP for Japan and several European countries. The RBA and MPC minutes are released this week. Several key Fed and ECB officials, including Bernanke and Trichet, will speak this week.

FX Technical Key points

EUR/USD is bearish, target 1.4300, key reversal point 1.5150
USD/JPY is bearish, target 85, key reversal point 92.50
GBP/USD is bearish, target 1.5050, key reversal point 1.7000
USD/CHF is bullish, target 1.0650, key reversal point 1.0000
AUD/USD is neutral, watch 0.8850 and 0.9500
NZD/USD is neutral, watch 0.7300 and 0.7725

Mr Longchamp is head of trading at RTFX Ltd.

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