US dollar fall raises questions on global stability

The dollar went to a three-month low against the yen and a near one-year low against the euro following remarks by Bernanke which indicated that the Fed may halt its moves to lift interest rates after an expected rise of 0.25 percentage points when its policy-making committee meets later this month.

Speaking to the Joint Economic Committee of Congress last Thursday, Bernanke said: “At some point in the future, the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook.”

Since the start of its rate tightening policy in June 2004, the Fed has increased the base rate 15 times, lifting it from 1 percent to 4.75 percent. If the Fed does undertake a further increase to 5 percent it will mean that the base rate will be around 3 percentage points higher than the underlying rate of inflation. A real base rate of 3 percent is considered to be neutral, provoking neither inflation nor an economic slowdown.

Even before Bernanke’s comments, it was clear from the minutes of the Fed’s policy meeting last March that the policy of rate tightening did not have long to run and several members “expressed concern about the dangers of tightening too much.”

Read More
http://wsws.org/articles/2006/may2006/doll-m02.shtml