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Confidence in the Fed is critical if the U.S. central bank is to exit from its easy money policy in a way that doesn't lead to higher inflation or hurt the recovery, Philadelphia Federal Reserve Bank President Charles Plosser told a conference in Helsinki.

"It is troubling that the public's inflation concerns can be so volatile," he told a conference hosted by the Global Interdependence Center and the Bank of Finland, according to remarks prepared for delivery.

"It suggests that there may be less confidence in the credibility of the Fed's commitment to price stability than we might desire," Plosser, a well-known inflation hawk, said.

Last summer, concerns the U.S. could face a sustained period of falling prices prompted the Fed to step in with a second round of so-called quantitative easing to further support the economy. That program, known as QE2, is scheduled to end this month.

Recently, rising food and energy prices have fueled concerns about inflation. The Fed believes commodity price rises will be temporary and won't have a lasting impact on inflation.

Plosser said these swings in the public debate shows the need for clear communication from the Fed. He repeated his long-standing call for an explicit inflation target and a systematic exit plan from the Fed's extraordinarily easy monetary policy.

"Given the extraordinary amount of liquidity present in the U.S. banking system, it is reasonable for the public to be concerned about the prospects for inflation down the road," said Plosser, who has a vote on Fed policy this year.

The Fed cut interest rates at record lows near zero since December 2008 and has kept them there since. It has also bought bonds to further support the economic recovery, more than tripling its balance sheet to around $2.7 trillion.

At its April meeting, the Fed signaled it was in no rush to tighten monetary policy. But minutes of that meeting showed policymakers discussed potential exit strategy options at length.

Plosser said as the Fed normalizes policy, it should return to an operating framework in which the benchmark federal funds rate is the primary instrument of monetary policy. In this framework, the Fed's balance sheet should shrink to "probably less than $1 trillion" so that the fed funds rate trades above the interest on excess reserves.

The interest on excess reserves is a new tool that Congress gave the Federal Reserve's Washington-based Board of Governors -- not the Fed's policy-setting committee -- during the financial crisis.

Plosser said he would find a "floor system" framework in which the interest on excess reserves rate is the de facto policy rate "troubling" as it puts no limit on the size of the balance sheet.

"If our operating framework divorces our balance-sheet decisions from monetary policy, it becomes a tempting instrument for future policymakers inside or outside the central bank to use it for non-monetary-policy purposes," Plosser said.

"This could jeopardize the independence of the central bank and, if abused, would be a source of many unforeseen problems."

(Reporting by Kristina Cooke; Editing by Marguerita Choy)

The weakest U.S. jobs growth in eight months in May has knocked the dollar lower across the board and pushed down Japanese stocks to a two-month low, confirming for investors that the global business cycle has shifted to slower growth and a defensive stance in portfolios is desirable.

The falling dollar has in turn pushed up the euro, which despite no solution in sight for the euro zone's debt crisis may find some traction this week and support commodity prices.

Follow the U.S. jobs data, the two outstanding questions for investors are if the synchronized slowdown reflected in industrial indicators around the globe is a warning of something worse on the horizon and whether monetary policy can again come to the rescue of major economies.

For that reason, this week's meetings of the ECB, embroiled in questions about the need for more Greece aid, the Bank of England, the Reserve Bank of Australia and the Bank of Korea will be focal points for investors.

The euro was steady at $1.4633 after earlier hitting a one-month high above $1.4650 in the wake of the May U.S. payrolls data on Friday. The euro has bounced nearly 4 percent in the past three weeks, helped by hopes that Greece is close to securing billions of euros in aid.

MORE GREEK DRAMA

A new aid package for Greece could cost more than 100 billion euros ($144 billion), German news magazine Der Spiegel said in its latest issue to appear on Monday.

Even with tens of thousands of Greeks taking to the streets to protest austerity measures yet to become law and European leaders still debating what to do about the country's mountain of debt, traders have been growing increasingly numb to the news flow surrounding Greece.

After speculators slashed their net long euro position in the International Monetary Market to a fifth of what it was a month ago, market positioning is not standing in the way of a further rebound in the common currency.

The next major obstacle for the euro on charts is $1.4710 -- the 76.4 percent retracement of the move down from $1.4940 to $1.3968. Given the negative sentiment building against the dollar though, $1.50 may draw the euro like a magnet.

The ECB may take the opportunity on Thursday after its policy meeting to prepare markets for an interest rate increase in July, an outcome that would widen rate differentials into the euro zone's favor.

"The ECB is likely to send a relatively hawkish message -- after all, growth in the euro area has been amongst the most resilient (and data surprises the least negative)," Barclays Capital strategists said in a note.

"It is therefore quite possible that the euro retests higher levels, especially against the backdrop of an improvement of the picture for peripheral bond markets."

The euro has drawn the attention of global investors because of how closely other markets have been tracking the currency's ups and downs.

The positive correlation between the euro and the Reuters-Jefferies CRB index of 19 commodity prices .CRB was running at more than twice its historical average, suggesting the strong likelihood that euro strength also will mean strength in commodities prices.

VALUE IN JAPAN?

Japan's Nikkei share average ended down 1.2 percent .N225, its lowest close since March 18.

Fast Retailing (9983.T), operator of the Uniqlo clothing chain, was the biggest drag on the Nikkei, down 2.7 percent, erasing Friday's gains. Shares of Tokyo Electric Power Co (9501.T), operator of the crisis-plagued Fukushima Daiichi nuclear plant, plunged 25 percent on fears of being delisted.

For Japan's stock market, a significant issue is whether valuations can contract any more than they already have in an economy waylaid by natural disasters and political ineffectiveness. Japanese equities were trading at 0.7 times current book value, Thomson Reuters StarMine showed, the second cheapest market in the G20. Italy is the only cheaper market.

"What other major global stock markets are undervalued to this extent?" said Kenichi Hirano, a strategist at Tachibana Securities. "The U.S. market may have entered a correction phase, but the Tokyo market may not follow suit."

Markets in China, Hong Kong, Taiwan and South Korea were closed for a long holiday weekend, but traders were on watch for further tightening measures by China's central bank.

In commodities markets, U.S. crude futures inched lower but could resume a climb with the dollar's outlook darkening.

The July contract was down 0.2 percent at $100.05 a barrel.

Gulf Arab OPEC members led by Saudi Arabia look like they will push for an increase in supplies on Wednesday in an effort to support flagging world economic growth by bringing crude prices back below $100 a barrel. These expectations, however, have not had much a downward impact on oil prices yet.

(Additional reporting by Ayai Tomisawa in TOKYO and Reuters FX Analyst Krishna Kumar in SYDNEY; Editing by Ramya Venugopal)

The tough warning appeared in the overseas edition of the People's Daily, the leading newspaper of China's ruling Communist Party, indicating that political tensions between the United States and China over Internet security could linger.

Last week, Google said it had broken up an effort to steal the passwords of hundreds of Google email account holders, including U.S. government officials, Chinese human rights advocates and journalists. It said the attacks appeared to come from China.

The Chinese Foreign Ministry rejected those accusations, and the party newspaper warned Google against playing a risky political game.

By saying that Chinese human rights activists were among the targets of the hacking, Google was "deliberately pandering to negative Western perceptions of China, and strongly hinting that the hacking attacks were the work of the Chinese government," the People's Daily overseas edition, a small offshoot of the main domestic paper, said in a front-page commentary.

"Google's accusations aimed at China are spurious, have ulterior motives, and bear malign intentions," said the commentary, written by an editor at the paper.

"Google should not become overly embroiled in international political struggle, playing the role of a tool for political contention," the paper added.

"For when the international winds shift direction, it may become sacrificed to politics and will be spurned by the marketplace," it said, without specifying how Google's business could be hurt.

The latest friction with Google could bring Internet policy back to the foreground of U.S.-China relations, reprising tensions last year when the Obama administration took up Google's complaints about hacking and censorship from China.

Google partly pulled out of China after that dispute. Since then, it has lost more share to rival Baidu Inc in China's Internet market, the world's largest by user numbers with more than 450 million users.

Google last week that the hacking attacks appeared to come from Jinan, the capital of China's eastern Shandong province and home to an intelligence unit of the People's Liberation Army.

U.S. Defense Secretary Robert Gates over the weekend warned that Washington was prepared to use force against cyber-attacks it considered acts of war.

In February, overseas Chinese websites, inspired by anti-authoritarian uprisings across the Arab world, called for protests across China, raising Beijing's alarm about dissent and prompting tightened censorship of the Internet.

China already blocks major foreign social websites such as Facebook and Twitter.

(Editing by Miral Fahmy)