27 March 2015 US Fixed Income Weekly Whither the dollar> The bigger issue for the economy and the financial markets is the dollar. To be sure, the Fed is worried about its recent appreciation, which has been the fifth fastest on record. It has been eclipsed only by the moves in 1981-1982, 1984-1985, 1997 and 2008-2009. In the case of the two 1980$ episodes, high real interest rates, which were induced by tight monetary policy, were the root cause of dollar appreciation. In 1997, the surge was due to the abandonment of fixed currencies in the Asian bloc. The most recent previous period of dollar strength occurred during the global financial crisis, which resulted in a massive flight to safety into US Treasury securities. The current period is different: The US economy is arguably the healthiest of the major industrialized economies, and the Fed is still expected to raise interest rates this year. Other central banks such as the BOJ and ECB are at different stages of the business cycle and are both pursuing expansionary monetary policies designed to weaken their exchange rates. In order to gauge the implications of the strengthening dollar for monetary policy, we simulated a one-time, 14% shock to the trade-weighted dollar (the current move from last summer) in the Federal Reserve Board's macroeconomic model of the US economy, often just referred to as FRB/US. All else being equal, the simulated shock causes real GDP growth to decrease by about -0.5 percentage points (or 50 basis points) and -0.8 percentage points, respectively, one and two years after the shock occurs. This is also broadly consistent with what we found when we estimated the impact of the change in the dollar on the contribution of net exports in the GDP accounts. As we illustrate in the accompanying chart, changes in the trade-weighted dollar tend to impact net exports with a lag of approximately two years. When the dollar strengthens, net exports tend to weaken as US manu