The same holds true for the exchange rate value of the dollar. The exchange ratio between the dollar and other currencies is a function of what is happening in the economies of those other currencies and it is a function of how the Federal Reserve conducts monetary policy in the United States. We must never forget the Fed has monopoly power over the issuance of currency. Therefore, the Fed has a moral and fiduciary obligation to keep the value of the currency constant.
The problem is, in a world of floating exchange rates the Fed has no reliable bench mark against which to judge whether it is maintaining a constant value of the dollar. All it has available are secondary indicators of the dollar's stability.
By latching onto interest-rate targeting as the mechanism by which the Fed decides how many bonds to buy or sell, the Fed has mistaken cause for effect just as it did in the early 1980s when it latched onto adjusting the "quantity of money" as the means of conducting monetary policy. Of all the secondary indicators of dollar stability, only sensitive commodity prices, gold being the pre-eminent among them, are direct enough and understood well enough to serve well as a gauge by which the Fed can decide whether to buy or sell bonds and how much to expand or contract its portfolio of bonds.
I believe Treasury Secretary John Snow understands very well the necessity of replacing the so-called "strong-dollar policy" with a "stable-dollar policy." After all, we don't want a rising dollar or a falling dollar; we want a stable dollar. As Snow observed, we want the currency to be a good store of value and a currency people are willing to hold over time.
In order to ensure a stable dollar of constant value, it has long been my view that the Fed should announce that it intends to maintain a fixed dollar price of gold, or if gold is politically incorrect, then announce that it will maintain a fixed dollar price of an index of price-sensitive commodities. Then the Fed can conduct monetary policy in such magnitude as necessary, to hit that price rule instead of always fighting the last monetary war.