The dollar surged while oil and gold tumbled yesterday after Ben Bernanke surprised markets by making clear the Federal Reserve does not want the US currency to weaken any further because of the risks to inflation.
The Fed chairman's comments mark a radical break with the US central bank's practice of not commenting on the dollar, a privilege traditionally reserved for the US Treasury secretary.
His decision to speak out signals the importance the Fed puts on price pressures from abroad at a time when oil has hit record highs but domestically generated inflation pressures remain muted.
The Fed chief said “in collaboration with our colleagues at Treasury, we continue to carefully monitor developments in foreign exchange markets”.
Dollar weakness over the past year had “contributed to the unwelcome rise in import prices and consumer price inflation”.
The Fed was “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations”, he added.
It would “formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations”.
The dollar, which was under pressure ahead of Mr Bernanke's comments, jumped nearly 2 cents in the space of an hour after he spoke and was up 0.6 per cent to $1.5440 against the euro in mid-afternoon trading, 0.8 per cent to Y105.30 against the yen and 0.2 per cent against the pound to $1.9640.
Oil fell steeply to trade below $126 a barrel, while gold plummeted $18 dollars to $875 before recovering to $883 by lunchtime in New York. Yields on 10-year Treasuries edged higher.
Mr Bernanke stressed the attention the US central bank is paying to the risk of inflation.
He noted the risk that inflation expectations could rise and that sustained high headline inflation – pushed up by energy prices – could unsettle those expectations.
But he did not indicate a predisposition to raise interest rates soon.
“For now, policy seems well positioned to promote moderate growth and price stability over time,” he said