The markets continue to show their appreciation for Fed Chairman Bernanke’s testimony yesterday and mortgage rates are falling in response.
So, why do the Chairman’s words hold such sway over global markets? Simple. Buying and selling U.S. dollar-denominated securities is an integral part of central banking fiscal management policies worldwide. When the Chairman says that inflation is subsiding, it really means that the dollar will not be expected to lose value.
That’s what inflation is, after all. It’s the erosion of the dollar’s purchasing power.
If the dollar is expected to lose value, countries that hold U.S. dollars in reserve are likely to sell them to stave off losses. Selling dollars introduces more supply into the marketplace and more supply leads to lower values.
Ben Bernanke’s testimony yesterday (temporarily) put to rest the whispers about the Fed being scared of runaway inflation. Markets are adjusting their expectations — and their portfolios — to plan for a stronger dollar in the months ahead.