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Fed Governor Richard Fisher, speaking in Dallas yesterday vigorously argued that a strong dollar is central to economic stability. Answering audience questions after a speech to the Dallas Friday Group, Fisher said the U.S. dollar is a "faith-based currency" dependent on the credibility of a central bank.

In addition to a faith-based currency, we are the currency of the world and we must maintain its integrity. As far as my involvement is concerned, I will spend every ounce of energy doing that. I have no doubt that my colleagues will do exactly the same.

Now how are they going to defend the dollar? There’s only two ways for the Fed: make dollars scarcer or raise interest rates. Clearly they haven’t chosen the former method since the money supply has been rapidly expanding. So they have chosen to raise interest rates. Will this work? No one knows, but the stakes are very high. Should the dollar implode as many bears and doomsday pundits suggest, the rumor of a new Plaza Accord would become reality.

Stock investors don’t like the notion of ever increasing interest rates. Bulls have been betting that the Fed was almost done raising rates. The only conclusion from Fisher’s comments is that interest rate increases may continue much longer. In fact, it wouldn’t surprise me if the Fed raised rates by 50 basis points soon. This would shock markets and perhaps strangle commodity price increases (including precious metals), rally bonds and push stocks and the economy into a slide. See Chart (AMEX: SPY)


Source: Fed's Fisher's Comments Chill Stock Investors (ETF: SPY)