First, I should start by saying that the Secretary of the Treasury, of course, is the spokesperson for U.S. policy on the dollar and Secretary Geithner had some words yesterday. Let me just add to what he said, first, by saying that the Federal Reserve believes that a strong and stable dollar is both in American interest and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. But over the medium term, where our policy is aimed, we’re doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability by maintaining the purchasing value of the dollar, keeping inflation low. That’s obviously good for the dollar. The second thing we’re trying to accomplish is to get a stronger recovery and to achieve maximum employment. And, again, a strong economy, growing, with attracting foreign capital, is going to be good for the dollar. So in our view, if we do what’s needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.

Dallas Fed President Richard Fisher, speaking to reporters after a townhall-style event with local business leaders in this central Texas town, said he wants the dollar to be more than "the best horse in the glue factory."

The foreign exchange value of the dollar has fluctuated considerably during the course of the crisis, driven by a range of factors. A significant portion of these fluctuations has reflected changes in investor risk aversion, with the dollar tending to appreciate when risk aversion is high. In particular, much of the decline over the summer in the foreign exchange value of the dollar reflected an unwinding of the increase in the dollar's value in the spring associated with the European sovereign debt crisis. The dollar's role as a safe haven during periods of market stress stems in no small part from the underlying strength and stability that the U.S. economy has exhibited over the years. Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.

And overseas--as a consequence of more-expansive U.S. monetary policy and distortions in the international monetary system--we see an increasing tendency by policymakers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies. Extraordinary measures tend to beget extraordinary countermeasures. Second-order effects can have first-order consequences. Heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery. These, too, are developments that the FOMC must monitor carefully.

It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers.

It also concerns me that the most recent Lipper/AMG financial market data show year-to-date flows into virtually all asset classes except money market funds. The flows are strong into every category: high-risk to low-risk bond vehicles, taxable and nontaxable, domestic and external, fixed and floating rate, and, of course, commodities. Margin debt remains shy of 2007 highs but is fast approaching levels that prevailed before the NASDAQ implosion in 2001; in fact, margin-account debit balances as a percentage of the market capitalization of the S&P 500 now exceed the precrash level of 1987 and 2001.

Junk yields are at their lowest levels since October 2007. And the leveraged buyout market is back to paying 2006 levels of EBITDA (earnings before interest, taxes, depreciation and amortization) of 6 to 8.5 times, with the recent announcement of Carlyle Group’s reported 11 times EBITDA purchase of Syniverse Holdings echoing the peak of the precrash craze. As you know, buyout people do not typically acquire companies with a plan to expand the workforce, but instead with an eye to tighten operations, drive productivity, rejigger balance sheets and provide an attractive payback, usually in shorter time than under normal corporate horizons. And the corporations I talk to that are eyeing possible acquisitions with their surplus cash and ready access to the credit markets are not given to thinking of strategic acquisitions as a way to expand payrolls.

In sum, scanning the business landscape and the conditions of the financial markets, I concluded as a golfer that the greens are playing very fast and must be approached with great caution. At a minimum, I concluded, the committee would need to be very careful in how we calibrated our next strokes, lest we overplay it.

I fully understand the theoretical impulse to drive long-term interest rates to lower levels in hopes of stimulating loan demand and challenging the propensity for economic actors to hoard rather than invest. Given that foreign exchange markets react to interest rate differentials between countries, one effect of engineering lower rates would be to devalue the dollar, presumably to create demand for exports. The ultimate objective would be to advance final demand, generate employment for American workers and revive output.

Warsh said a reliable currency is a “great historical strength” for the U.S. that allows investment from sources outside the country. In general, having “certainty” over foreign-exchange rates is “useful” for businesses, he said. Economic outcomes tend to be worse when governments are preoccupied with foreign-exchange policy, he said.

The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

Asked about record gold prices and the decline of the dollar, Plosser said "I think we don't want to entirely dismiss that... I do think from a policy standpoint that we need to be cognizant of what these asset markets are doing and.. better understand how they may or may not be giving us clues about what the future may hold."

"For the foreseeable future, the dollar will remain the leading currency both for reserves and transactions," Bernanke said. "The issue at hand is whether or not the dollar will retain its value, and I think it will. I think it will be strong," the nation's top central banker said. 

The dollar will stay strong "because the U.S. economy is strong," and because "the Federal Reserve is committed to making sure we have price stability in this country."

As reported by Dow Jones Newswires

In response to a question about Zhou Xiaochuan's comments about the need for an international reserve currency:

I haven't read the governor's proposal. He's a -- a remarkable -- a very thoughtful, very careful distinguished central banker. Generally find him sensible on every issue.
But as I understand this proposal, it's a proposal designed to increase the use of the IMF's special drawing rights. And we're actually quite open to that suggestion.
But you should think of it as rather evolutionary, building on the current architecture, than -- rather than -- rather than moving us to global monetary union.

...

I think the dollar remains the world's dominant reserve currency. I think that's likely to continue for a long period of time.  And as a country, we will do what's necessary to make sure we're sustaining confidence in our financial markets and in -- and in the productive capacity of this economy and our long-term fundamentals.

It should be noted that the decline in the dollar from 2002 reversed an appreciation of the dollar that took place from the early '90s until that point. And it's related to the dynamics of our trade deficit, as you alluded to.

      In the late '90s and early 2000s, strong capital inflows drove the dollar up. But that made us less competitive and created a trade deficit. Some had to be unwound to bring us back toward a better balance in trade. And, in fact, we have been seeing considerable improvement in our balance of trade as the dollar reversed that increase.

"The weakening dollar factors into our sense of economic growth and inflation," Richmond Federal Reserve Bank President Jeffrey Lacker told an audience after giving a speech here.

"In the current environment, the extent to which it has added to inflationary pressures, particularly with commodity and energy prices, is definitely a prime risk on our minds.

"What we're going to do about it is conduct policy the way we always have, which focuses on domestic inflation," he said.

...

Lacker, voicing long-standing views of the Richmond Fed and many others in the economics' profession about the unwelcome consequences of interfering with markets, made plain he would be reluctant to support {foreign currency intervention}.

"I think foreign currency intervention by central banks is a mistake...as a matter of general policy," he told reporters after the speech.

As reported by Reuters

I would never take intervention off the table -- or any policy tool off the table.

In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.  The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation.  We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.  Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency.

One of the first rules you learn if you're working for the Federal Reserve is to leave comments about the dollar to the Treasury. I'm more
than happy to adhere to that rule ... Having said that, I'd be careful about mistaking correlation and causation. Just because energy prices and the dollar seem to move together -- pick any two prices or [indistinct] you happen to be interested in -- just because they happen to move together doesn't mean there's a causation there.

From Q&A as reported by Market News International