Why does low inflation make the dollar stronger and more stable?
First, a terminological point. “Strong” is an unfortunate word choice in this context, though it’s commonly used. The dollar is “strong” when, compared to other currencies, it’s more valuable than it has been in the recent past. Thus, “strong” is a relative thing. Moreover, “strong” suggests “good,” so that people think it’s good to have a strong monetary unit and bad to have a weak one. That’s not a hard-and-fast rule; it all depends on the circumstances. For example, let “currency X” stand in for all foreign monetary units, and suppose that the current exchange rate between the dollar and currency X is $2 per X. At $2 per X, is the dollar strong or weak? That depends. If the dollar was recently trading at a rate of $1 per X, then the dollar is weak because it’s declined in value relative to X. But if the dollar had been trading at $4 per X, then the dollar is strong, because it’s increased in value relative to X. A “strong” dollar is generally good for imports and bad for exports; a
