By Charles Wyplosz

In 1971, with the greenback weak and falling, US Treasury secretary John Connally famously told the rest of the world that the US dollar was “our currency and your problem”. Thirty years later, with the dollar strong and still rising, Robert Rubin, his successor, no less famously stated that “a strong dollar is in the interest of the United States”.

These days, because the dollar is weak and falling, we would have expected US officials to return to Connally’s mantra but they unexpectedly chose Rubin’s. On reflection, glorifying a strong dollar when it is so weak means they do not care. Connally without compassion, if you prefer.

Jean-Claude Trichet, president of the European Central Bank, is thereby left bemoaning “excessive exchange rate moves”. This, too, is an extraordinary statement. In the past week the dollar has barely lost 1 per cent vis a vis the euro. That is significant, but “excessive”? Yes, he may be reacting to the 6 per cent dollar depreciation in the past month. Or to the 17 per cent change over the past 12 months. Or perhaps the 31 per cent depreciation since the dollar was last strongish in late November 2005.

Well, currencies float. They are bound to be sometimes overvalued and sometimes undervalued. This is what they do and these numbers are not especially large by historical standards. Margaret Thatcher, former UK prime minister, was right when she said that exchange rates were a matter for markets to decide.

Of course, markets react to monetary policies. As the US economy faces a recession, a weak dollar is in the country’s interests. As inflation exceeds its own definition of price stability, a strong euro is in the interests of the eurozone. End of story? Not quite. (Continued)

Charles Wyplosz is professor of economics at the Graduate Institute of Geneva. The remainder of his column can be read here. Comment from our expert panel and guest members can be read below.

By Paul De Grauwe

Since the creation of the eurozone in 1999, inflation has been very low (on average 2 per cent a year) and moved very little. The European Central Bank deserves much of the credit for this success.

The puzzling thing, however, is that the ECB claims to monitor closely the development of the money stock (in particular of M3, a broad measure of money) and says this monitoring exercise contributes to its success.

That cannot be true. Since the start of the eurozone, average yearly money growth (M3) has been close to 7 per cent while inflation was only 2 per cent, a huge gap. In addition, money growth has been subject to wild fluctuations. From less than 4 per cent in early 2001, it shot up to 8 per cent during much of 2001-03. Then it declined again to less than 5 per cent. In the past few months it has exceeded 10 per cent. During this whole period, inflation has been moving at a steady pace of 2 per cent a year, or a few decimal points lower or higher.

So there has been a great disconnection between inflation and money growth in the eurozone. Inflation has barely budged from its 2 per cent horizontal path while, according to traditional thinking, the “excessive liquidity creation” observed throughout the period should have led to much higher inflation. It did not.

The recent double-digit increases in M3 again prompted warnings that this will inevitably lead to inflation. Maybe. But up to now the facts show that money growth has been irrelevant to explaining inflation in the eurozone.

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Being prime minister of Italy is not much fun. Last week’s downgrading of Italy’s government debt by Standard & Poor’s and Fitch Ratings must seem just another blow to a government that won a narrow election victory and has since seen its support in opinion polls slump. Yet appearances may be deceiving. Italy needs such shocks if it is to put through the needed policy changes.

The analysis by Fitch Ratings presents a dismal story.* Over the past five years, gross domestic product has grown at a compound rate of just 0.6 per cent a year. In contrast to Germany and Japan, Italy’s weak growth is also, in substantial part, the result of deteriorating external competitiveness. Domestic demand has grown by about 0.4 percentage points a year faster than GDP since 2000.

Because Italian inflation has been somewhat higher than Germany’s, monetary conditions have been relatively supportive, with real short-term interest rates averaging around zero since 2000.

The remainder of Martin Wolf’s column can be read here (FT.com subscribers only). Discussion from our guest economists is free - click ‘Comments’ below.