The US Dollar

I traded currencies over the 1975-1980 period. I
stopped because I had more pressing priorities. I did
alright with it, but it often gave me a headache and a
strained bladder because it was not smart to wander
away from active screens. Globally, ForEx is one of
the biggest games in town and has become ever so
sophisticated.

I will not be returning to trade, but the subject of the
dollar is interesting. My view of the dollar is too
simplistic for the average ForEx whiz, but thinking about
it rounds out the view.

To me, the dollar retains value if a dollar saved earns a
decent premium over the rate of inflation here and if the
Fed is not printing too much currency. Regarding the latter,
I watch FOMC activity and the monetary base. The FOMC has
been stingy for months now, and with a 91 day T-Bill yield
of 5.1% against an inflation rate now around 3%, the dollar seems
ok to me. I think the record will show the dollar tends to
hold its value when there is a decent real risk free rate
available. The dollar tends to fall when the Fed accelerates
the growth of the basic money supply and when the T bill %
falls relative to, or worse, down through the inflation
rate.

It is obviously important that monetary policy should protect
the value of savings, and provide that stability through time.
Deviations should be brief and only reflect the need to counter
significant economic risk.

Many observers believe the exchange value of the dollar must
fall sharply to reflect our large and growing deficit on
current account. The simple idea being that the world is
approaching a point where there are so many dollars offshore
that the dollar must eventually fall relative to other
key currencies as well as to gold -- sort of a hefty discount
for excess. Surely the dollar should fall in relative value
if it is poorly maintained at home. Whether the exchange
value should plummet even if we maintain a good standard at
home eludes me.

But, since a fair number of visitors to this site are currency
players, I'll stick my two cents worth in on occasion.