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 The Fed staffers are not only U.S. policy wonks, but also the stewards of the global financial system – the U.S. dollar being the world’s reserve currency. It plays a strategic role as a medium of global trade and investment. Central banks hold hundreds of billions of dollars as reserves. There are many countries that subcontract their own monetary policies to the Fed by pegging their currencies to the U.S. dollar. Their respective inflation rates are directly tied to any mistakes the Fed makes.Since the Fed plays a key role in ensuring the stability of the world’s monetary system, it behooves the Fed to not appear to be favoring a devalued currency – which it seems to be. If the rest of the world loses faith in U.S. monetary management, there could very well be a run on the dollar - forcing the Fed to raise rates quickly to restore its credibility. The result could be a fairly severe recession.

The Fed is obviously worried about growth after the recent credit implosion, but growth is evident (third-quarter growth being higher than the second) – at a time when the Fed has been lowering rates. Bernanke is clearly responsible for the U.S. dollar’s credibility as the world’s reserve currency. This news is brought to you by www.forexmentor.comSource: National Post-Financial Post/Wall Street Journal, Nov. 2/07

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