NEW YORK (TheStreet) -- The Federal Reserve should have raised its short-term interest rate at its last meeting for one really big reason: the dollar.

The reason given for not raising the rate was weakness in the United States economy. But the Fed should have heeded more closely the performance of the U.S. dollar in foreign exchange markets. The dollar has weakened in recent days. A weak dollar hurts Americans' buying power, and can lead to inflation as companies that depend on exports raise prices. All this can slow the economy.

Consider how the latest weakening occurred.  

Over much of this year, many observers believed the Federal Reserve would raise its short-term policy interest rate. When it seemed as if the Fed was going to follow through, the value of the U.S. dollar rose in foreign exchange markets. When the Fed backed off, deciding the time was not right, the value of the dollar plummeted.

The Federal Reserve has been in a peculiar position for about a year-and-a-half. The Fed's monetary policy has been out-of-sync with much of the rest of the world. Whereas the United States economy was rising, although not as fast as some would have liked, other economies decelerated with the possibility of inflation moving into deflation.

In early May 2014, one Euro cost over $1.39. It was at that time that the European Central Bank started quantitative easing, a policy that the Federal Reserve was planning to leave by the end of October.

As a consequence, the value of the dollar rose as the cost of the Euro fell. By the start of 2015, the price of the Euro had fallen to about $1.20. The dollar was growing stronger.

On March 5, 2015, the Euro closed at just over $1.10. Many observers thought that this was a good price.

The Euro traded below $1.10 through April. The reason for this move was that the Federal Reserve admitted that the data on the U.S. economy was not strong enough to warrant a spring rate increase.

On Aug. 11, 2015, the Chinese devalued the renminbi and this set off tremors in foreign exchange markets.

The Euro closed around $1.10 on Aug. 10, but by Aug. 24, it was up to almost $1.16. Markets settled down after that. 

Through early September, it looked as if the Fed was going to raise the rate. The Euro dropped in value to about $1.11 on Sept. 9. But, then markets sensed that maybe the Fed would not raise its policy rate. The Euro rose trading up around $1.13, as the Federal Open Market Committee meeting that month drew nearer.

The Fed announced that it would not raise the rate and the Euro rose to more than $1.14.

The rate has declined since then but has remained roughly in the $1.12 to $1.13 range. The reason for this apparently is that few market participants believe that the Fed will raise its policy rate this year. Many don't see any raise until March.

The market seemed to be comfortable when the value of the Euro was around $1.10.

Has the Federal Reserve missed a chance to take the lead in a new economic era. The period that the world is entering is going to require something different from its economic leaders. The U.S. and other world economic leaders will have to adopt more conservative monetary policies because they will have to bear in mind that their actions have a profound impact globally. 

The United States is responsible for maintaining the stability of its currency. It is also is responsible for helping other emerging markets evolve. The new era will probably have few major reserve currencies and will maintain relatively fixed exchange rates.

How important is this? The Euro strengthened this summer going from around $1.06 in early April, to the current level of over $1.12. Analysts are already citing this rise as impacting German exports. This event led the the European Central Bank to consider extending its current round of quantitative easing well into next year.

At this stage the world does not need competitive exchange rate movements.

If the Fed raises short-term interest rates prematurely, it risks an increase in unemployment. This would violate its Congressional mandate to help achieve high levels of employment.

U.S. capacity utilization is running below 78%, the lowest cyclical peak rate of capacity utilization in more than 50 years. Capacity utilization is a measure of manufacturing strength. Meanwhile, the labor force participation rate is running at 62.4%. That's the lowest level since the late 1970s. The employment problem is more than just cyclical. 

The economic problems of the United States link to structural problems that require longer-term solutions. Clearly, the U.S. needs to cope better with global, economic change.

But the Federal Reserve didn't help the U.S. economy's cause with its recent passiveness. The Fed needed to pay closer attention to foreign exchange markets. It needed to chart a path that would keep the dollar at a reasonable level. The increasingly global economy sometimes means moving with the flow of things instead of trying to swim against the tide. 



This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.