Ben Bernanke, used to criticism from economists and lawmakers, is under attack from a new front: fellow international policy makers who accuse him of being a poor steward of the world's reserve currency.
The U.S. dollar continues to suffer in anticipation of the Federal Reserve pumping more money into the financial system, and in the wake of a weekend G20 finance meeting that did little to dispel that idea.
Now, the focus turns to next week's meeting of the U.S. central bank's policy committee, and the widely expected decision to launch a fresh round of quantitative easing by buying up hundreds of billions of dollars in securities.
On the weekend in South Korea, Germany's economy minister Rainer Bruederle set the tone for the debate over the Fed's plans.
"An excessive, permanent increase in money is, in my view, an indirect manipulation" of the value of the dollar, Mr. Bruederle told reporters in Gyeongju, the small city on South Korea's southeast coast that played host to a meeting of G20 finance ministers and central bankers.
Mr. Breuderle's remarks suggest that it's not only the upstart economic powers who are upset with Mr. Bernanke, the U.S. Fed chairman - old friends among the Group of Seven club of advanced economies are upset too.
The anxiety springs from the leading role the Fed plays in the "currency war" narrative that has absorbed traders, policy makers and analysts for the past month. China, the usual bogeyman for volatility in foreign-exchange markets because of the tight leash it keeps on the yuan, has countered that loose monetary policy in the United States is the real problem, causing a stampede of capital out of the world's largest economy in search of higher yields.
Fifteen of 16 major currencies rose against the U.S. dollar on Monday, including the yen, which touched a 15-year high, and the loonie, which jumped 0.63 cents (U.S.) to reach 98.01. Colombia's peso fell against the dollar after President Juan Manuel Santos said he would take steps this week to slow the currency's rise.
But those who would have the Fed set policy based on the dollar's value are probably asking too much. To expect Mr. Bernanke to address volatility in foreign-exchange markets would mean rewriting his marching orders from Congress.
Like other central banks in democracies, the Fed is allowed a certain amount of independence from politicians by promising to adhere to a defined mandate. In the U.S., the Fed's duty is to maintain price stability and achieve "maximum" employment. Earlier this month, Mr. Bernanke made it clear that the Fed is in danger of falling short of those targets because deflation remains a threat and the economy is growing too slowly to generate sufficient job growth. Under those conditions, the Fed has little choice but to do whatever it thinks is necessary to fulfill its mandate or risk the wrath of Congress.
"The Fed's job is to focus on domestic stability of prices and employment and it's going to do so as best it can," said Marvin Goodfriend, an economics professor at Pittsburgh-based Carnegie Mellon University and a former adviser at the Federal Reserve Bank of Richmond. "The dollar's weakness might be a consequence of easing, but it's not the point."
Those who accuse the Fed of actively seeking to weaken the dollar to give exporters an advantage misunderstand the way the way the U.S. economy works, said Prof. Goodfriend. The U.S. is a relatively closed economy in that it generates little wealth from exports; that's why the Fed is intent on finding ways to stimulate domestic demand, he added.
In Gyeongju, the G20 agreed to "move toward more market-determined exchange-rate systems" and to "refrain from competitive devaluation of currencies." The communiqué also said "advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates."
Given the relative strength of emerging-market economies such as China and Brazil, it is likely investors would be flocking to those countries regardless of the policy-setting at the Fed. Still, with a benchmark interest rate near zero and strong guidance from central bankers that they are primed to create more dollars to buy securities, Fed policy is clearly amplifying the market conditions that are putting upward pressure on currencies in countries ranging from Australia to Thailand to Switzerland.
"The U.S. will always focus disproportionately on its own interests," Joseph Stiglitz, a Nobel laureate in economics who teaches at Columbia University in New York, said earlier this month. "In this case, what is a concern to me is that the U.S. is getting very little benefit out this measure, but is imposing a really large cost on the rest of the world."Report Typo/Error