Federal Reserve officials on Thursday downplayed the consequences of the falling U.S. dollar, underscoring that deflation is still a threat, especially with commercial real estate prices falling.

Dallas Fed President Richard Fisher said in an interview with Market News International that the weakening dollar, which hit a 15-month low against major currencies on Monday, is only one of the factors the Fed watches when setting policy.

You pay attention to this, Fisher said in reply to a question about the effects of a weaker dollar.

On the other hand, in terms of its inflationary input, unless it becomes disorderly, a depreciating dollar -- a gradually depreciating dollar -- doesn't necessarily add an enormous inflation impulse.

Fisher will become a voting member of the Fed's policy-setting committee in 2011.

The dollar has fallen 7 percent so far this year and likely has become a funding vehicle for bets on higher-yielding currencies in growing emerging markets.

Philadelphia Fed President Charles Plosser, answering journalists' questions after a speech in Singapore, was also not worried about dollar weakness.

There's no particular reason you wouldn't expect the dollar to go back to where it was before the panic set in -- that is essentially all it has done at this point. I don't view that as anything particularly of concern, he said.

Plosser will also in 2011 become a voting member.

TRADE OFFS

Fed Chairman Ben Bernanke in a speech on Monday startled investors by commenting directly on the dollar's value. He said the focus on the Fed's dual mandate of price stability and jobs growth will help the dollar to be strong.

In the MNSI interview, Fisher acknowledged there are what he called trade-offs between the Fed's policy of keeping interest rates very low for an extended period and a strong dollar.

Expectations of a protracted period of lower U.S. rates has sent waves of capital overseas in search of higher returns. Asia, which was last in and first out of the financial crisis, has absorbed a lot of this investment, giving rise to asset bubble fears and worries policymakers will tighten capital controls.

So far, Brazil and Taiwan have taken action to curb capital inflows.

However, Plosser downplayed the threat of asset bubbles in Asia.

For the most part, the flows are not such that I consider them to be threatening or inconsistent with fundamentals, Plosser said. The prospects for economic growth are stronger in Asia than in the U.S., and you would expect some of those flows.

Both Fisher and Plosser pointed out areas of weakness remaining in the U.S. economy even as they acknowledged a recovery underway.

Fisher said he is concerned growth will fall short of 3 percent in 2010 and unemployment will remain high for a prolonged period.

This is not a very jobful recovery, he said.

Plosser said commercial real estate remains in problem as well and falling prices in the industry threatened small and medium-sized U.S. banks.

(Additional reporting by Nopporn Wong-Anan in SINGAPORE; Writing by Kevin Plumberg; Editing by Kazunori Takada)

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