Federal Reserve Chairman Ben S. Bernanke signaled he's done cutting interest rates for now and raised his biggest concerns yet about the inflationary effects of the dollar's 16% drop in the past year against the euro.

The Fed is working with the Treasury to "carefully monitor developments in foreign exchange markets'' and is aware of the effect of the dollar's decline on inflation and price expectations, Bernanke said today in his first speech on the economic outlook in two months. In addition, interest rates are "well positioned'' to promote growth and stable prices, he said.

The dollar climbed more than 1 cent against the euro and the price of gold dropped $8 after Bernanke's remarks. Policy makers lowered the benchmark rate 3.25 percentage points since September to 2 percent to alleviate the damage to the economy from the credit crisis and housing recession.

``I can't recall such a strong defense of the dollar from a Fed chairman,'' said Sophia Drossos, a currency strategist at Morgan Stanley in New York, who used to work at the New York Fed, where she helped manage the central bank's foreign-exchange holdings. ``The Fed is putting its marker down in letting the market know that a weaker dollar would be detrimental.''

Bernanke, 54, spoke via satellite to the International Monetary Conference in Barcelona, Spain. He is talking on a panel with European Central Bank President Jean-Claude Trichet, Bank of Japan Governor Masaaki Shirakawa and Bank of Spain Governor Miguel Fernandez Ordonez.

`Moderate Growth'

``For now, policy seems well positioned to promote moderate growth and price stability over time,'' Bernanke said. ``We will, of course, be watching the evolving situation closely and are prepared to act as needed to meet our dual mandate.''

The remarks come as the central bank's optimism that inflation is abating and growth will start to pick up has been dashed by the unexpected surge in oil prices, which is eroding the potential benefit to the economy from more than $100 billion in federal tax rebates. The resulting increase in inflation expectations is also getting the attention of Fed officials.

The dollar strengthened to $1.5456 against the euro from $1.5607 today after weakening by 16 percent in the past year. Crude oil fell to $126.25 a barrel in New York at 10:49 a.m. from $127.98 in the minutes before Bernanke's comments were released at 9 a.m. Yields on Treasury securities rose, and U.S. stocks were mixed.

``We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations,'' Bernanke said. The Fed's commitment to price stability and maximum employment ``will be key factors ensuring that the dollar remains a strong and stable currency.''