Earlier this week, President George Bush nominated Benjamin Bernanke, currently Chairman of Bush’s Council of Economic Advisors, to replace Alan Greenspan as Chairman of the Federal Reserve Bank. Many analysts have since weighed in on the nomination, speculating as to how Bernanke will conduct monetary policy. Bernanke’s economic ideology is Keynesian, which purports to use government spending and tax cuts to stimulate economic growth. By analogy, Bernanke could conceivably conduct monetary policy with the goal of achieving economic growth at any cost, even if it means maintaining interest rates that are artificially low.

The implication for currency traders is clear. If Bernanke devotes the bulk of his efforts to economic growth rather than fighting inflation, he will be reluctant to raise interest rates. The law of interest rate parity states investors must be compensated for holding the currencies of nations with high rates of inflation. Thus, if Bernanke fails to control inflation as Alan Greenspan did, the USD will suffer in the long run.

“While equities markets may welcome such a ‘stimulative’ mindset, currency markets will likely treat Bernanke with great suspicion, particularly with regard to the U.S. dollar.”

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