Here is why: Through its direct and indirect control of American interest rates, the Fed exercises a decisive influence on dollar-denominated asset valuation models.
With that in mind, how can anyone think that peripheral foreign exchange moves and flagging East Asian growth dynamics could throw the Big Board into an irretrievable decline?
The Fed also controls a currency that remains an indisputable unit of account, means of payment, and store of value for the world economy. No other wannabes come even close to the greenback’s “moneyness” characteristics. And, the Fed willing, the dollar can easily retain its key currency status for a long, long time to come.
The Fed’s alleged “benign neglect” of the dollar is a myth, because the dollar’s relative price is one of the main variables determining trading conditions in one-third of the U.S. economy. But since the dollar is the anchor of the global financial system, the U.S. cannot actively orient its value to suit its foreign trade objectives, as is the case of export-driven developing economies. No, the Fed indirectly influences the dollar’s exchange rate by adjusting the quantity of money to execute its mandate of full employment and price stability.
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