By Vicki Schmelzer

NEW YORK (MNI) - A day after Federal Reserve Chairman Ben Bernanke roiled the currency market with his dollar-centric comments, the market continued to debate his intent in stepping into FX territory, deemed the purview of the Treasury Department, as well as possible implications for U.S. monetary policy.

The Fed chair's remarks Monday prompted a knee-jerk reaction higher in the dollar as the market did a rapid rethink of extended short-dollar positions.

"We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability," Bernanke said.

"Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial," he added.

The euro fell nearly 100 points in response to Bernanke headlines, with the pair bottoming around $1.4880-85 before rebounding to close at pre-comment levels near $1.4975.

Analysts, in their commentary, Tuesday did not view his remarks as "verbal intervention," but rather a warning that the Fed was keeping an eye on the value of the dollar.

"Bernanke seemed to be pointing out that within the context of the Fed's powers and mandate, the FOMC was doing everything it could to stabilize the fragile US economy, which will eventually underpin a strong U.S. dollar," said T.J. Marta, fixed income strategist at Marta on the Markets.

In addition, he said Bernanke's dollar comments "seemed more like a response to China's charges that the Fed is creating a massive carry trade bubble than a verbal intervention on behalf of the dollar."

Credit Suisse strategists observed that Bernanke's comments were "virtually identical to the comments he made in June 2008" in terms of reminding markets that the Fed is paying attention to dollar movements.

"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations," Bernanke said June 3, 2008.

"Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy -- including flexible markets and robust innovation and productivity -- will be key factors ensuring that the dollar remains a strong and stable currency," he said at the time.

Credit Suisse did not view Bernanke's remarks Monday as a sign that dollar weakness was nearing levels that might merit Fed tightening.

"In contrast, we read Bernanke's speech as very dovish," they said.

"Bernanke made clear he thinks constraints on banking sector lending and the weak labor market will act as drags on U.S. growth. In response to a question about bubbles he said he saw no clear signs of misalignment in U.S. asset prices," Credit Suisse said.

Todd Elmer and Michael Hart, currency strategists at CitiFX, maintained that the Fed Chair's rhetoric "signals that the dollar decline is well on the radar of the Fed and U.S. authorities may be more prone to acquiesce to stronger rhetoric opposing U.S. dollar weakness."

"This is something to watch at forthcoming G7, G20, etc. meetings," they said.

While similar dollar supportive comments may moderate the pace of the dollar's decline, it is unlikely to cause a major shift in the market's overall bearish sentiment, CitiFX said.

"In addition, current U.S. dollar short positioning is not particularly stretched and investors may continue to look to sell on rallies," the strategists said.

Analysts doubted that it was Bernanke's intent to strengthen the dollar with his speech.

However, they acknowledged that it is unusual for the Fed to talk so pointedly about the dollar.

Zach Pandl, economist at Nomura Global also noted that Bernanke's dollar comments were a repeat of what had been heard in 2008.

"The Fed last commented directly on the value of the dollar in June 2008, then in coordination with the Treasury," he said.

At the time, the trade-weighted value of the dollar was a bit lower than current levels, he said.

"We believe Chairman Bernanke's comments reflect a desire to prevent a disorderly decline in the currency, rather than halt its depreciation altogether," Pandl said.

"The dollar's steady decline over the last few months is unlikely to affect the Fed's inflation outlook, in our view, given low pass-through into domestic prices in recent years, he added.

Bernanke can talk about the exchange rates because "a falling dollar is inherently inflationary, both directly and indirectly (via import prices and the expectations effect)," said Barbara Rockefeller, president of Rockefeller Treasury Services in Essex, CT.

She stressed however that it is rare for a Fed chairman to speak about the dollar and monetary policy "in the same breath."

The market now wonders whether the Fed, in assessing appropriate monetary policy, will more explicitly consider the dollar.

"That is what spooked the market yesterday and again overnight," Rockefeller said.

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