bernanke: us could withstand sharp dollar drop

Economy could withstand sharp dollar drop: Bernanke
Tue Mar 21, 2006 11:21 PM ET
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By Tim Ahmann
WASHINGTON (Reuters) - The chronic U.S. trade gap need not fuel a "precipitous" decline in the dollar, but the economy may be able to shrug it off if it did, Federal Reserve Chairman Ben Bernanke said on Tuesday.

"Although U.S. trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment," Bernanke said in a letter to Rep. Brad Sherman, a California Democrat.

The shortfall in the U.S. current account, the broadest measure of the nation's overseas trade, widened to a record $804.9 billion last year, or 6.4 percent of U.S. gross domestic product. Some analysts have said the widening of the trade gap could lead to a potentially damaging dollar drop.

While Bernanke downplayed those concerns, he said "the possibility of a future disruptive correction of the U.S. trade deficit cannot be ruled out."

"The best way to protect the U.S. economy from such an event is to continue policies designed to maintain the stability of the financial system and the flexibility and resilience of the economy," he added.

Bernanke noted that the U.S. Treasury secretary was the chief spokesman on U.S. policy on the dollar, but said current policy was to let markets determine the dollar's value.

"Stated U.S. policy has been generally not to intervene in currency markets except to counter disorderly market conditions," he added.

The letter, which was released by Sherman's office, was in response to questions the lawmaker submitted in connection with a February 15 House of Representatives Financial Services Committee hearing on monetary policy.

In the letter, Bernanke also restated the Fed's position that Congress should review an exemption that lets commercial firms acquire industrial banks, warning that decisions on the issue could have "important ramifications" for the economy.

Industrial banks are state-chartered and state-regulated, and fall under the supervision of the Federal Deposit Insurance Corporation (FDIC). Commercial companies may own them because federal laws that bar nonfinancial companies from engaging in banking activities do not classify them as banks.

Wal-Mart Stores, Inc. (WMT.N: Quote, Profile, Research), the world's largest retailer, has applied to open an industrial bank in Utah, an application under review by the FDIC. Continued ...

© Reuters 2006. All Rights Reserved.


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