Bernanke's policy push means week of reckoning ahead

Federal Reserve chairman Ben Bernanke's push to jump-start the United States economy this week may weaken the US dollar, forcing at least one other central bank to add its own stimulus to offset a rising exchange rate.

Bernanke is set to embark on an unprecedented second round of unconventional monetary easing, one result of which may be a cheaper dollar that boosts US growth by helping American exports. A related consequence: stronger currencies abroad, threatening European and Japanese expansion.

With the major central banks all announcing decisions within 33 hours this week, fallout from the Fed could cause Bank of Japan governor Masaaki Shirakawa to do more for his economy and Bank of England governor Mervyn King to leave the door open to more aid.

Even as European Central Bank president Jean-Claude Trichet holds the line against inflation, he may eventually change course if the euro surges, while emerging markets are already acting to restrain currencies.

"An easing in US monetary policy creates pressure on the rest of the world to respond," said Dominic Wilson, senior global economist at Goldman Sachs Group.

"The subsequent weakening in the dollar tends to tighten financial conditions outside the US."

This week's meetings are the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis. On that occasion, all except Japan joined an unprecedented co-ordinated interest-rate cut. Now they're invested in dealing with their own challenges.

Bernanke has signalled he will restart large-scale asset purchases to help reduce unemployment and raise consumer prices.

King indicated last month he may ultimately favour buying more bonds to support the United Kingdom's recovery as its Government aims for the biggest budget cuts since World War II.

Shirakawa and his colleagues, after vowing to keep their benchmark interest rate at "virtually zero" last month and expanding their balance sheet, plan to buy exchange-traded funds and real-estate-investment trusts to beat deflation.

Trichet nevertheless calls the ECB's monetary-policy stance "appropriate". The central bank president is focusing on tougher fiscal discipline as the path to assure growth after runaway deficits led to Greece's near-default and a continental debt crisis.

"It's a nice idea to co-ordinate policy but a central bank has to do what's appropriate for its own economy," said DeAnne Julius, a former Bank of England policy maker who is now chairman of Chatham House, an international research group in London.

"It's difficult to do otherwise, economically and politically."

On Wednesday in Washington, at about 2.15pm local time, the Fed will release its policy decision. About 18 hours later, at noon in London, the UK central bank will announce its move. The ECB will go public with its decision 45 minutes later in Frankfurt. The Bank of Japan concludes its talks on Friday at about noon local time.

Since Bernanke said on August 27 that his central bank was prepared to add stimulus if necessary, the Standard and Poor's 500 Index has gained 13 per cent, while the dollar has declined about 7 per cent against a basket of six currencies. Estimates for the ultimate size of the Fed's asset-buying programme include US$1 trillion ($1.3 trillion) by BofA-Merrill Lynch and US$2 trillion by Goldman Sachs.

Some companies in the US and UK stand to gain from monetary stimulus and weaker currencies.

Caterpillar, the world's largest maker of construction and mining equipment, predicts about a one-third increase in US new-home starts next year, partly because of Fed easing.

The risk of the ECB's tightening bias is that a stronger euro threatens exports, which have led the region's recovery, as well as the ability of so-called peripheral economies such as Greece to escape deflation. The single currency has gained about 7 per cent against the dollar since mid-September.

The Bank of England is caught between the ECB and Fed. Its policy makers last month indicated they moved further toward raising their asset-purchase programme from £200 billion ($419 billion), according to the minutes of an October 7 meeting at which they split three ways over what to do. Thirty- eight out of 40 economists surveyed by Bloomberg News say policy makers won't change their programme this week.

The BOJ's Shirakawa said that shifting the date of his policy meeting to this week from November 15-16 wasn't linked to the Fed.

- BLOOMBERG