Dollar stumbles as Federal Chairman Ben Bernanke testifies that the US recovery will be slow

By Manzer Munir

Washington DC- Federal Reserve chairman Ben Bernanke was on Capitol Hill Wednesday during his twice yearly monetary policy testimony to give an update to Congress regarding the country’s economic health. He warned Congress that despite various government actions to spur economic growth, the sluggish jobs market is still a huge concern for the markets. The US dollar also came under heavy pressure as a result of the recovery doubts cast by Bernanke earlier to congressional leaders. The fears on Wall Street were also boosted by a report that showed new home sales plunged in January.

“The dollar has fallen across the board in response to Bernanke’s initial statements,” said Kathy Lien, director of currency research at Global Forex Trading. “The fact that Bernanke is not entirely optimistic about U.S. economic recovery and the fact that he did not telegraph additional tightening proves to be disappointing for dollar bulls.” Lien said the dollar has rallied since the middle of February on the chance that the Fed would be more aggressive than other central banks, but Bernanke’s comments suggest that the central bank will not be as aggressive as previously hoped.

A weaker dollar does have some benefits according to analysts. For one, the cost of US produced goods becomes more affordable to consumers in other countries and therefore can help decrease the trade deficit as more American goods are sold. A weak dollar can also be good news for American manufacturers. Their products become less expensive, so they can sell more. That is why companies such as Lockheed and John Deer like a weak dollar. This is also why many economists like it since as the big U.S. manufacturers sell more, the U.S. trade deficit shrinks.

But the negative effects of a weaker dollar can also be bad for the economy as a weaker dollar means that there is a cut in the real spending power of American consumers, which in effect makes for a reduction in real income. Secondly, a weaker dollar also lowers the role of the US currency as the world’s reserve currency of choice. Also, a weaker dollar can make inflation soar as this will increase the costs of Imports. A weaker dollar would encourage foreign investments to go to other countries and not invest their money in American markets. Most economists agree that the value of a currency reflects the perceived value of a country in the global marketplace. Therefore, maintaining and strengthening the dollar would be in the best interests of American consumers, investors, and the economy.

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