Philadelphia Federal Reserve president Charles Plosser told reporters Thursday that he was not surprised by the dollar's decline, and said that its weak state is a reversal of the run-up after last year's economic panic.
Speaking after a speech in Singapore, Plosser said that there was "no particular reason why you wouldn't expect the dollar to go back to where it was before the panic set in."
The Philadelphia chief is one of many Fed officials who have commented on the dollar in recent days, something that Fed officials rarely do. On Monday, Fed chairman Ben Bernanke said that that the central bank was monitoring the dollar's volatility, but would continue to focus on its objective of 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," Bernanke said.
During his speech, Plosser commented on the world's central bank's ability to control inflation and protect their credibility in the face of price shocks in food and energy.
"Large relative price shocks to food and energy pose problems for central banks because they can alter expectations of inflation and undermine the credibility of central banks' commitment to price stability," he said.
Plosser said that central banks could enhance their credibility by setting explicit inflation goals, remaining transparent on interest rate decisions, and becoming more independent.
Independence has contributed to the ability of central banks to promote greater economic stability and lower inflation rates," he said in prepared remarks. "It has done so because it has enabled monetary policy to take an intermediate- to long-term view without the fear or interference of short-term political concerns."
He added that central banks need to build a reputation for keeping inflation low and stable, which can help the countries avoid shifts in the public's expectations of inflation when price shocks increase consumer prices.
"Indeed, there is some evidence that countries that have adopted inflation targeting have better anchored inflation expectations than countries that have not adopted such targeting," he said. "In emerging markets, inflation targeting is found to reduce the level and volatility of inflation expectations, while simultaneously lowering the overall rate of inflation."
Plosser added that setting an inflation target would also help to minimize expectations of deflation.
"A credible inflation target has the benefit of minimizing the volatility stemming from unanchored inflation expectations to either the upside or the downside," he said.
Plosser said that transparency in monetary policy would also help to lead to a predictable and efficient economy, because it makes it easier for consumers to develop expectations about policy decisions.
"This approach allows households and businesses to more accurately form expectations and therefore make better decisions," he said.
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