Being by far the largest transactions and store-of-value currency, the dollar is a direct and powerful transmission mechanism of American monetary policies to the rest of the world.
This rather unique situation, where a national legal tender also serves as a currency of choice in most global flows of trade and finance, remains a hotly debated issue. I shall put to the side the political aspects of that discussion in order to concentrate on economics.
And the key economic policy question is this: Since the dollar is the world currency, should the Fed's decisions be couched in terms of global economic issues, or should the Fed just focus on the U.S. economy?
To confuse the gallery, the argument is often presented as a dollar dilemma: "Defend" the dollar (with rising interest rates) and damage the U.S. economy, or let the dollar go where it may (aka, the dollar's "benign neglect") to "protect" America's economic growth.
A false dilemma
In fact, there is no dilemma. The Fed does best for U.S. national interests and for the rest of the world when it lives up to its own policy mandate.
What? I can hear the howls about the simplistic (and jingoistic?) "America First" ideas. So, please let me explain by using the Fed's mandated policy objectives about growth, employment and price stability.