Fed Chairman Bernanke Rings the Forex Market Bell

The Chairman of the US Federal Reserve Bank, Ben Bernanke, rings the forex and commodity market bell during a speech he made yesterday by satellite TV to an economic conference in Barcelona Spain. Helicopter Ben finally spoke out about the sad condition of the US Dollar and it’s contribution to a higher US inflation rate and said the following:

“In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets. The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are 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 erosion in longer-term inflation expectations.

” He continues, “Over time, the Federal Reserve’s commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy–including flexible markets and robust innovation and productivity–will be key factors ensuring that the dollar remains a strong and stable currency.”

Those of you who are experienced stock traders probably have heard the old saying that “they don’t ring a bell” to announce market tops or bottoms or significant turning points. However in this instance Mr. Bernanke came as close as you will probably ever experience as to an important government official stepping up and ringing a bell to let you know the the US has finally realized the errors of its way in letting the Dollar slide to historic low levels against major currencies.

While one speech will not alone turn the Dollar around Bernanke’s speech does serve notice that Dollar bears had best be careful with their short Dollar forex positions and that for at least awhile the Dollar bulls may be about to gain the upper hand. On the back of Bernanke’s comments the Yen immediately gained about 125 pips against the Dollar and the Euro gave up about 100 pips fast. Very fast.

Today the Dollar has given back some of yesterday’s gains as forex traders mull over Bernanke’s Dollar comments. However, the Dollar looks like it is consolidating and will soon move higher. The big question, of course, is will the Fed stick to its resolve should additional bad economic data continue to be released every month?

Should the Fed start to raise rates to help strengthen the Dollar that action would likely ring another bell for the stock market. With the stock market already soft higher interest rates could send it sharply lower in a hurry.

Mr. Bernanke and the Fed are in a no win situation. Lower rates will speed up the Dollars decline and higher rates will probably tank the stock market and add to the housing market’s woes. However, with inflation zooming to the upside the forex market will, at least for now, likely listen to the bell ringing by Mr. Bernanke and count on a bit of inflation fighting by the Fed as it attempts to strengthen the Dollar.

The Fed is becoming fearful of an inflation tiger, perhaps a pack of tigers, that it will not be able to control. It looks like it is ready to risk placing further pressure on the US economy by taking steps to fight inflation. The quickest way to do this is by raising rates and helping the Dollar to strengthen. Look for a stronger Dollar policy to start kicking in over the next few days.

As the Dollar gains strength the Fed surely hopes that the price of crude oil, gold, wheat, rice, and other soaring commodities will moderate and that will help to lower the inflation rate. Unfortunately, while this may help other factors are at play, like soaring demand for grains, the effect that climate change is beginning to have on food production, and increased demand for oil from fast growing economies in nations like India and China.

As a perfect economic storm gathers for the US economy it may already be that any Fed action will be too little too late for the Fed’s stronger Dollar efforts to have much lasting impact on unpleasant economic events that are probably already set to occur.

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