Fed Finally Notices the Dollar

Ben Bernanke finally took notice of the dollar today in a speech in Barcelona, Spain:

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 an erosion in longer-term inflation expectations. 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.

I actually think Bernanke has it backwards on the dollar. It is not the Federal Reserve's "commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy" that will result in a stable dollar. It is a stable dollar which will contribute to price stability and sustainable employment. Nevertheless, it is nice to see Bernanke at least acknowledge that the dollar is an important part of their policy decisions. The market is responding to the speech by bidding up the dollar against most currencies.