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24 May 2005

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Blimpish

Given that the Greenback's still the world reserve currency, it's not easy to operate a clear and consistent strong dollar/weak dollar policy anyway. Isn't the number something like 80% of USD balances being held outside the US? In that situation, focusing on the exchange rate can have quite unpredictable consequences, requiring a potentially very erratic monetary policy to keep on the target.

That leads into the wider point as to why the exchange rate shouldn't be the prime consideration - the US economy is highly domesticated, with most trade being wholly USD-denominated. Stabilising a (strong/weak) external exchange rate would mean destabilising that domestic trade, which doesn't seem to be a good idea.

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