NEW YORK (TheStreet) -- It seems as though financial markets would like to see the euro valued at $1.08 to $1.12, which is the range in which this currency pair has traded for much of the time since January.
But "Mr. Market" seems to be saying that that would mean that the Federal Reserve would have to raise short-term interest rates at its meeting this month (Sept. 16-17).
The value of the euro fell vs. dollar at the end of January -- to about $1.12 -- on the belief that Federal Reserve policymakers were going to beginning raising the federal funds rate this year.
Viewed the other way, the value of the dollar increased against the euro. This happened because all else being equal, higher interest rates in one country tend to make its currency more attractive to investors.
In February, it seemed as though March would be the time the Fed would move, and the exchange rate dropped below $1.12 by the end of the month and even fell below $1.05 by the middle of March. (Remember, when this exchange rate falls, it means the dollar is worth more vs. the euro.)
Then disappointment set in as the Fed backed off ... and the rate went higher again.
Coming through the summer, the hope has been that the Fed would raise short-term interest rates at its September policy meeting. As the central bank wavered, however, so did the dollar -- to the point where the euro traded up toward $1.12, even getting into the $1.13 range at times.
Then the Chinese devaluation hit. This event, following the decline in the Chinese stock market, caused investors to think that the Fed would back off from raising short-term interest rates in the wake of a world financial crisis.
Immediately, the euro cost more than $1.12 and even reached almost $1.16.
The price fell only as Federal Reserve officials began to speak out and try and reassure the market that the rise in short-term interest rates was not "off the table."
The euro dropped back to around $1.12, although it has traded slightly higher than that as uncertainty continues about what the Fed might do.
The world is confused and uncertain about what the Fed is doing and when it might do it.
Because of this, it seems that there are three possible actions the Fed might take at its September meeting.
The first two would undermine confidence in the Fed, and the uncertainty and confusion would continue.
The first option is to raise short-term interest rates at the upcoming September meeting on the basis of the "data-driven" reasoning the Fed has been spoon-feeding the public since the end of quantitative easing.
Raising the rate at this meeting for this reason would make it look like the Fed is seeking credibility after 10 months or so of waffling.
Why? Because the Fed has already signaled to the market that there may not be any further interest rate increases in the near future to follow an initial hike. After an initial hike, the upward path for short-term interest rates would be very shallow and very slow or might not include further increases at all.
The message to the market: Fed policymakers seem to be stuck with this choice because of all the events of the past 10 months. Therefore, such a decision will be seen as a face-saving move regardless of what the policy-setting Federal Open Market Committee says.
The second option is to back off from the rate increase with the excuse that world events have kept the central bank from raising rates at this time.
If the Federal Reserve chooses either of these options it will appear that it is just being reactive and not proactive. Neither move would put the Federal Reserve in the strong leadership position that "Mr. Market" seems to want.
From the behavior of the market over the past eight months or so, it would seem that the dollar value of the euro might rise to the $1.15 to $1.16 range and the market would stay very volatile.
The market would still possess a lot of uncertainty, and prices would continue to be volatile.
The market would like to see some leadership from the Federal Reserve!
As stated above, the market seems to want the dollar to be trading with the euro in the $1.08 t0 $1.12 range.
That is, the market wants to see a stronger dollar in the world and continued waffling by Federal Reserve leadership is not going to achieve this goal.
Thus, financial markets would like to see the Federal Reserve step out and take a firm position with respect to the dollar. "Mr. Market" would like the Federal Reserve to stick to its guns and raise its target for short-term interest rates, but make the move from the position that it wants to maintain the strong value of the dollar.
Last week, the world got a wake-up call. The world is different now than it was a few years back. Financial flows and trade flows have made the world more connected. The growth of China has meant that there is not just one major economic power in the world.
And, in such a world the U.S. just cannot conduct itself the way it has over the past 60 years or so. The U.S. cannot just act like it is the only really important economic power in the world. The U.S. cannot just depreciate its currency over 40 or 50 years, as it did beginning in the early 1960s.
The dollar has achieved a stronger position in the world, not through the intentional actions of its leaders. It got there because of what others were doing.
Most of the other central banks in the world, with the exception of the Bank of England, are continuing to pursue easy monetary policies or to move in that direction, and that is the major reason why the value of the dollar is as high as it is today.
But, now the U.S. finds itself in a position to exert some real leadership. And it needs to. This is because the world has changed.
China wants to have a strong economy and a strong currency. It has gone through some setbacks this year, but these are still its aims.
The eurozone was to have a strong economy and a strong currency. And, so do some other major countries within the world.
Conducting economic policies that foster a weak currency is just not going to cut it in this world. And the new economic era is going to require working together, bargaining and compromising.
It would be ideal for the Federal Reserve to raise its target for short-term rates at the September meeting but say it's making that decision because it wants to maintain a strong dollar. This is what the markets want.
- Everything you wanted to know about the coming Fed rate increase.
- Three things the Fed may do at its meeting this month.
- What the Fed is watching in the economy before it makes a decision.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.