The dollar rose sharply on foreign exchanges yesterday after Ben Bernanke, the Chairman of the US Federal Reserve, issued a ground-breaking warning over the currency's slide in an apparent attempt to halt its decline.

In highly unusual remarks on the dollar's value, which the Fed normally regards as the exclusive territory of the US Treasury Secretary, Mr Bernanke sounded the alert over the inflationary impact of the currency's losses. He said that the US central bank was “attentive” to these dangers.

The Fed chief intervened as central banks' mounting worries over the inflationary shock from record oil prices were highlighted when Jean-Claude Trichet, President of the European Central Bank, said that the world was testing environmental limits to growth that were raising inflation.

In his first significant public remarks on the dollar, Mr Bernanke laid out the Fed's anxieties over the repercussions of its slide, which he said had “contributed to the unwelcome rise in import prices and consumer price inflation”.

Speaking at a Spanish conference attended by Mr Trichet, he said: “We are attentive to the implications of the changes in the value of the dollar for inflation and inflation expectations ...” He added that the Fed would scrutinise developments in foreign exchange markets.

Mr Bernanke reinforced expectations that the Fed will keep interest rates on hold as he reiterated its forecasts that the US economy should start to revive this year and rebound more strongly in 2009.

He said: “For now, policy seems well positioned to promote moderate growth and price stability over time. We may see somewhat better economic conditions during the second half of 2008.”

He conceded that risks would remain until house prices in the United States stabilised and that there were also dangers from record oil prices.

Some economists said that Mr Bernanke's decision to defend the dollar openly could be a sign that the Fed was becoming more concerned over the role of the currency's slide in propelling the price of crude ever higher, adding to US economic woes.

Oil prices retreated sharply after the Fed Chairman's remarks, dropping by more than $3 a barrel, while the dollar's broad trade-weighted index against a basket of currencies rose by 0.5 per cent to 73.297, the highest since May 14.

Mr Trichet gave warning that global appetites for finite natural resources - driving their prices higher - were complicating the central banks' task of keeping inflation tamed.

He said: “Mankind is gradually accustoming itself to the Earth as a limited, crowded and finite space - with limited resources for extraction and a narrowing capacity for waste disposal or pollution.

“The economics of that world, one that is increasingly pushing at the boundaries of development, requires an adjustment in our outlook and recognition of the complexities of the interactions in the global system.”

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