WASHINGTON - U.S. Federal Reserve chairman Ben Bernanke on Monday said the central bank will monitor the sliding U.S. dollar but pledged anew to keep interest rates at record lows to nurture the economic recovery.

In remarks to the Economic Club of New York, Bernanke engaged in a delicate dance. He tried to bolster confidence in the U.S. dollar without taking any real action.

"Bernanke is trying to use words - not interest rates - to prevent the dollar from going even lower," said Jay Bryson, global economist with Wells Fargo Securities.

Bryson and other analysts said they didn't think Bernanke was signalling that the Fed would join with central bankers in other countries to intervene in markets to strengthen the dollar. But that is an option for the Fed if the U.S. dollar were to start plunging.

Bernanke's remarks gave a brief lift to the dollar in trading Monday. But it resumed its fall after traders focused on his assertion that the central bank would hold interest rates low for an extended period. The U.S. dollar has posted double-digit declines against other major currencies since spring.

Low interest rates could put additional downward pressure on the dollar. And economists say a free-fall in the value of the dollar, while unlikely, can't be entirely dismissed. Still, low rates are needed to encourage consumers and businesses to spend more and fuel the economic rebound.

"We are attentive to the implications of changes in the value of the dollar," Bernanke said in rare remarks about the greenback. The Fed, he said, will continue to "monitor these developments closely."

Commodity prices - such as oil - have risen lately. That pickup likely reflects a revival in global economic activity and the recent depreciation of the dollar, Bernanke said. Commodities such as oil and gold are priced in dollars so they become cheaper when the dollar falls.

Despite "cross-currents" in the outlook for prices, the Fed chief predicted inflation probably will remain "subdued for some time."

That gives the Fed leeway to hold rates at record-low levels for an "extended period," he said, repeating a pledge made at the Fed's meeting earlier this month.

The sagging U.S. dollar has helped sales of U.S. exports because it makes those goods less expensive on foreign markets. But if the dollar were to plunge in value, it could ignite a new economic crisis in the U.S., prompting investors to dump their dollar holdings and driving up domestic interest rates.

Still, by holding rates at record-lows, the Fed risks creating a speculative bubble.

"It's extraordinarily difficult to tell" if a bubble is forming, Bernanke acknowledged. "It's not obvious to me in any case."

If a bubble did form, "we use our interest rate tools to try to meet our mandate - full employment and price stability," he said.

The Fed's decision to hold interest rates at exceptionally low levels after the 2001 recession was blamed for feeding the housing bubble. When the housing boom went bust in late 2006 the economy soon followed.

During the question and answer session, the Fed chief also urged Congress and the White House to trim the record US$1.42-trillion budget deficit, another force depressing the value of the dollar.

China, the No. 1 lender to the United States, has expressed concerns that the falling dollar threatens the value of its existing U.S. holdings. China also is the third-largest market for American goods, accounting for 6 per cent of U.S. exports through September.

The ICE Dollar Index, which measures the value of the dollar against a basket of foreign currencies, has fallen 16.7 per cent since March 4. The dollar is off 19.5 per cent against the Canadian dollar since March 9, while the euro is up 18.4 per cent since March 4. The dollar has also lost 12.2 per cent of its value against the Japanese yen since April.

In recent weeks, some Asian countries have been intervening to try to keep their currencies from rising further against the dollar. They are feeling pressure because of China's tight link to the dollar which has meant as the dollar has tumbled since March, China's currency has fallen in relation to their currencies, giving China a competitive advantage.

Economists expect the Fed will hold rates near zero at its next meeting on Dec. 15-16 and into part of next year to help the recovery gain traction.

Bernanke predicted the economy should continue to grow next year, but he warned of "important headwinds" that will restrain the recovery, including a weak job market and tight credit for small businesses and households.

After a record four straight losing quarters, the economy started to grow again in the July-September period at a pace of 3.5 per cent. Government-supported spending on homes and cars drove the rebound, raising questions about the staying power of the recovery once that assistance fades.

Bernanke said the rebound reflected more than "purely temporary factors" and predicted growth would continue into next year.

One of the biggest threats hanging over the recovery is rising unemployment. The nation's unemployment rate bolted to 10.2 per cent in October. It marked just the second time in the post-Second World War period that the jobless rate topped 10 per cent.

Some economists think it could rise as high as 11 per cent by the middle of next year before starting to gradually drift down.

Bernanke said the unemployment rate "likely will decline only slowly" if economic growth remains "moderate" as he expects.

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AP Business Writers Tali Arbel and Tim Paradis in New York and Martin Crutsinger in Washington contributed to this report.