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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: bentway who wrote (396516)	7/7/2008 12:09:43 AM
From: tejek	Respond to of 1574681

Markets calling Bernanke's bluff Wed Jul 2, 2008 4:14am EDT By James Saft LONDON (Reuters) - A surging oil price and a falling dollar show financial markets are giving short shrift to tough talk from Federal Reserve Chairman Ben Bernanke about fighting inflation and supporting the U.S. currency. Caught between a fragile economy and banking system and rising inflation -- being stoked in part by negative real U.S. interest rates -- Bernanke and the Fed seem to have arrived on a strategy of jawboning the dollar higher and inflation lower. And indeed, it would have been nice if it worked; the dollar is undoubtedly helping to drive oil prices higher and inflation fears can be soothed by faith in central banks. But talk is only effective if your audience judges that you have the means and the willingness to follow through. And when the Fed didn't signal that it would soon tighten in its statement accompanying its June 25 decision to hold rates at 2 percent, that faith, expressed as market prices, began to drain away. "The dollar is the barometer for Fed credibility," said Tim Bond, head of global asset allocation at Barclays Capital in London. "The dollar is going down and that says the Fed aren't going to be doing their thing. Their credibility is low and will remain low until they show they are prepared to sacrifice growth (to fight) inflation." The trade-weighted dollar index .DXY has slumped since the Fed's decision, falling about 1.5 percent since June 24. It is also now below where it was when Bernanke, in a highly unusual move for a U.S. central banker, issued a warning about the inflationary impact of a weak dollar. That verbal intervention, coming as it did less than a week before the European Central Bank all but announced its intention to hike at its meeting July 3, looks in retrospect like a bit of insurance. Had Bernanke not talked up the dollar, it would very likely have fallen rapidly, and perhaps in a disorderly way, when three days later ECB chief Jean-Claude Trichet effectively flagged his resolve to raise rates. And having spoken about the dollar and gained only a short respite, it will be interesting to see if Bernanke broaches the subject again and how currency traders react when he does. Similarly, a chorus of hawkish comments from Fed officials, combined with a signs of continued but weak growth, transformed expectations about the path of interest rates in May and June. A lack of follow through from the Fed has weakened those expectations again. U.S. short term interest rate futures now imply a roughly 50:50 chance that the Fed will stay on hold when next it meets in August, as against June 24 market pricing that placed a 74 percent probability on them hiking by 25 basis points. Continued... Previous Page 1 \| 2 Next Page reuters.com