USD Index Chart - Monthly 2009

USD Index Chart - Monthly 2009

So where next for the US dollar, and more particularly what are the FED’s intentions for the worlds number one currency as it continues to decline against all the major currencies and shows no signs of reversing the trend of the last 9 months (see Dollar Index chart above). Perhaps an early signal that the Federal Reserve is starting to become concerned about the demise of the US dollar came earlier this week with a rare comment from FED chairman Ben  Bernanke who acknowledged that the slump in the dollar was indeed causing some prices to rise as a result, but indicated that there were other factors which were holding inflation in check for the time being. Whilst the general tone of his comments were largely US dollar neutral ( but not indifferent), he once again re-iterated the FED’s policy of keeping interest rates low for an extended period whilst commenting that ” 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 Bernanake went on to say that the FED was committed to ensuring  these two aspects in rebuilding the US economy, and these factors would help ensure a strong currency in the future.

Whilst the above comments suggest little in the way of any change in policy, he then went on to say that any ‘significant changes’ in news or market conditions could affect monetary policy, which many analysts and market commentators have interpreted as a possible rise in interest rates once the fundamental news stream becomes more consistent and certainly well before inflation begins to become an issue once again. Whilst many have written of the US dollar in the longer term, personally it would come as no great surprise to see the FED enter the currency markets to support the US dollar, particularly as his comments on the weakness of the currency were unusual to say the least, and could therefore be interpreted as an acceptance by the FED that they may have to take some action to support the dollar, either with coded rhetoric or alternatively with direct intervention.

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