Christina Romer offers a nice primer on the actual economics of exchange rates and their tenuous relationship to the political debate about a “strong dollar”:
Strangely, every politician seems to understand that it would be desirable for the dollar to weaken against one particular currency: the Chinese renminbi. For years, China has deliberately accumulated United States Treasury bonds to keep the dollar’s value high in renminbi terms. The United States would export more and grow faster if China allowed the dollar’s price to fall. Congress routinely threatens retaliation if China doesn’t take steps that amount to weakening the dollar.
But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more in the current situation.
I think this highlights the necessity of moving beyond the strong/weak rhetorical frame. “Stop Chinese currency manipulation” is a tough-minded nationalistic slogan. “We need a strong dollar” is also a tough-minded nationalistic slogan. And politicians like to sound tough-minded and nationalistic. Another factor that deserves consideration here, however, is that retirees do have a strong interest in dollars being expensive.