Mick Weinstein The Week's Best Stock Blogs

While American consumers face incrementally higher prices in the marketplace and concern grows about inflation, the U.S. dollar has had an ever rougher time in the international currency market. The greenback is down no less than 20% against the euro in the past two years alone, and is 40% weaker against that benchmark currency since the beginning of 2002.

In an unexpected move this week, Fed chairman Ben Bernanke - who had previously brushed off concern about the dollar's weakening as insignificant for Americans - acknowledged for the first time at a bankers' conference Tuesday that the dollar's weakness has contributed to an "unwelcome rise in import prices and consumer-price inflation." Bernanke then let loose the kicker: Fed policy will ensure "the dollar remains a strong, stable currency" - a statement that gave the beleaguered American currency an immediate bump in Forex markets.

But financial bloggers are asking if that will last - and is it the right move in any case? In the meantime, everyone's still wondering how the typical American can hedge their portfolio against the dollar's ongoing weakness - especially if the dollar's swoon signals a much longer-term displacing of the global American empire. As always, click through for the full item if one of these statements piques your interest (emphasis in bold added):

Short-Term Impact of Bernanke's Statement

• "[T]he Fed usually genuflects in the direction of the Treasury when asked about dollar policy," says bond market veteran John Jansen. "[Tuesday's statement] is as lengthy a commentary as I can recall anytime recently on the dollar by a Fed official... This might be a less than subtle attempt to fire a warning shot across the bow of commodity traders for whom there has been pretty much a one-way trade higher. Maybe, the rate of increase will slow or diminish if traders have some fear that the Federal Reserve is resuming its role as bond market vigilante... the tenor of the speech reinforces the notion that rates will be on hold at 2 percent for quite some time."

• Grace Cheng believes Bernanke's words "are likely to support the US dollar in the short to medium-term... It is very rare for Bernanke to talk specifically about the dollar, so his voicing out of the US currency has definitely got everyone's attention."

• It's certainly the "most that has been said on the dollar since Bernanke has taken office," said Todd Sullivan. "For those of us who feel oil prices would come down substantially should the dollar strengthen, it is good news. It means Ben will begin to focus on that as a monetary tool rather than simple rate adjustments."

• Tanta at Calculated Risk notes that it's "unusual for a Fed Chairman to comment so directly on the dollar, and this probably means rate cuts are off the table for now - even if the economy weakens further."

• London-based trader Macro Man wonders "if the Fed hasn't gone on the Atkins or some other low-carb diet. For having eaten a steady diet of toast for the past nine months, the FOMC now appears to be worried about the level of the dollar." This is due to rising inflation concerns: "The fact that American policymakers have started to give a crap about the value of the dollar, however fleetingly, surely must take some of the shine off the dollar down bubble for now."

An Economic Model Shift on the Dollar?

• On the Economist's View blog, Tim Duy notes: "Fed Chairman Ben Bernanke can be criticized for following the wrong playbook. Years of academic research led Bernanke to conclude that the Fed's best response to the financial crisis is that which should have been deployed during the Great Depression. Fine on paper, but in practice he is using 1930's monetary policy in the economy of 2008."

• At Institutional Risk Analysis, economist Richard Alford concurs that U.S. officials have been using the wrong model for this global economy, and the dollar's descent is one repercussion: "One of the interesting aspects of economic policy in the US is a belief that we exist independent of the rest of the world. In the minds of many policy makers, the US is the focus and the rest of world economy is just a stable background. To open the model up to external factors, market imperfections, and quasi-floating exchange rates would increase the complexity of the model and limit the number of policy prescriptions that could be made, so most US economists pretend that the rest of the world does not exist, is stable, or that the dollar will quickly adjust so as to maintain US external balances. It has only been in the past few years that the trade deficit has moved to a level that is clearly unsustainable. The US economic model is yet to catch up with reality."

• It's Acts One and Two, says Fritz Hottinger, in the ongoing Dollar Drama, with U.S. Treasury Secretary Henry Paulson and Bernanke playing the leads. "The futility of these two performances makes evermore evident the continuing weakness of the dollar, and the parallel weakness of our government agencies to do anything about it...You are not alone in wondering what the Act III will be."

• But Michael Fitzsimmons believes that despite Bernanke and Paulson's "pontificating," Fed policy will continue to promote negative real interest rates and thus, a lower US dollar. "We know that jawboning a strong dollar policy (wink-wink) doesn't work. We know the US government will continue fudge inflation data."

• For Wall St. veteran Roger Ehrenberg, the weak dollar has been a source of "much consternation" over the past year. "My position has been pretty clear: a weak dollar is bad, not in and of itself, but because of the knock-on effects of such a policy." But "Mr. Bernanke has been turning a deaf ear to my pleas," until now. What worries Ehrenberg now is whether "pain taken quickly and sharply is, in the long run, a better policy than death by a thousand cuts. And given that the impact of Fed policy has a lag associated with it, are inflationary forces already unleashed in the system too far advanced for tighter monetary policy to tame them? Are we destined to suffer higher prices and higher interest rates due to the Fed's slowness in reining in liquidity to stem a plunging dollar?"

• At popular liberal blog DailyKos, author Glenmid sees political overtones in Bernanke's announcement: "the Federal Reserve has sat back, and let the Bush administration depreciate the value of the US dollar, in a cynical bid to boost US exports... If Obama wins, then I can see Bernanke pick up the phone, congratulate him, then tell him, he can't do this and he can't do that... Bernanke needs to fall on his sword, because one rule for a GOP president, and one for a Democrat president, isn't fair."

Portfolio Adjustments for the End of the American Empire

• Tim Iacono of Iacono Research observes that "right-thinking people with lots of dollars now realize they might be better off trading in a goodly portion of those dollars for something that holds its value a little better." Hard assets are one such class noted by Iacono.

• Foreign stocks are of course an important element in diversifying away from the dollar. Portfolio manager Roger Nusbaum agrees with PIMCO's Mohammed El-Erian that our era requires significant foreign holdings for American investors, but believes that "[h]aving more than half of the usual... equity exposure in foreign stocks would require people to change their thinking. I am not saying El-Erian is wrong, not at all, I'm just conceding that it would be difficult for a lot folks to just jump into."

• Oil ETFs have surged alongside the dollar's decline, but what happens to these hot equities if the dollar strengthens? Portfolio manager Gary Gordon weighs in.

• Raymond James analyst Jeffrey Saut says the writing's on the wall for higher interest rates, which would theoretically boost the dollar's value. Saut believes high-yielding stocks are current winners, and that it's (finally) time to reduce commodity exposure.