Quote Originally Posted by wiggin View Post
I understand that, Dread, but oddly enough increasing the fed funds rate does not necessarily the trade-weighted value of the dollar will rise. I know that's counter to traditional economics theory and I don't doubt that the long-run effect is to make the dollar more valuable. But in the short term, an increasing rate might do the exact opposite. For one, tighter monetary policy might signal a perceived improvement in the global economy, which might cause people to dump dollars to reverse the previous 'flight to safety'. For another, it might be perceived as a warning sign on inflation, which could also cause people to dump dollars. (Alternatively, markets might welcome the news as a sign of a proactive fed and downwardly revise inflation expectations.) Then there's the effect of dollar-buying strategies by exporting countries being unwound as the spread between their interest rates and the fed funds rate starts to shrink, taking pressure off their exporters.

The point is that the dollar's role as a reserve currency makes its exchange rate far more complex than a simple 'looser monetary policy increases the money supply' and vice versa.
Yes, but that's a whole separate subject from what I posted about, which was how dollar fluctuations impact US companies.