The doomers, who titillate us with "economic pornography", see the decline in the dollar as something worthy of screams; such as OMG and ain't it awful!
The reality is that because rapid economic growth in the developing world has resumed, there is suddenly demand for foreign capital; why hold US dollars when other countries are enjoying rapid growth? The obvious example being China, which grew its GDP at 8.9% this past quarter!
If an economy is growing at 8.9%, then that economy is going to attract capital one way or another. And yes, by causing the dollar to drop, the rapid growth in developing countries becomes the engine of growth for us.
Every time the dollar falls a notch, American assets go on sale; no matter if we are talking about real estate, stocks or spare production capacity, including labor. The growth in demand overseas leverages itself-up such that increased demand for capital overseas results in increased domestic capital.
No doubt, the FOMC must eventually "lean the other way". And, with history as our guide, we are assured that the FOMC will ultimately overshoot. The main reason for the persistence of overshooting is that the market takes over, which is exactly the process playing out now. After the FOMC starts the presses, the printing of money morphs into a function of markets.
With US unemployment pushing into double digit territory, there is a case to be made for continued economic stimulus. The decline in the dollar suggests that it is time to start reigning in the stimulus.
Getting the turn right is more art than science. It is not like the FOMC is shooting doves off a telephone wire. The doves are flying at 40 miles per hour. To hit the target, the FOMC has to shoot where the birds are going to be, not where they are.
Item 4. is the important issue. With so much spare production capacity in the US, it is common sense to err on the side of stimulus. The calm in the treasury markets fully counter the claim of gold, that inflation is ready to break-out. The only sector that is bumping up against capacity limits is the mobile communications sector and the rapid growth there is for the purpose of substituting energy efficient goods energy intense goods. Yes, the dollar can go lower, encouraging domestic growth, without pushing us into hyper-inflation.
"Supply-side, production-based multipliers are the best kind to have and they can outweigh the economic costs of higher import prices."
- Marginal Revolution: How can a weak dollar be beneficial? (view on Google Sidewiki)