The Weak Dollar Policy

I received an email from a friend, Nicholas Kreifels, recently. He reads this blog on occassion and wanted to send some thoughts on what he thinks is a "weak dollar policy". I got his permission to post his thoughts here:

...in regards to the Fed's current solution to the crisis.  I think of it like this, they are pouring all the water on the floor (i.e. liquidity flood) and not mopping it up.  Big banks continue to devour smaller, weaker banks, consolidating capital, posing an even larger systemic threat to the global economy.  The dollar weakens each day, which poses a severe threat to the U.S. economy in the long run by depreciating our currency and threatening our reserve currency status.  After all the liquidity floods the market, are we any better off?  I see one of two things happening, domestic companies mop up the liquidity, fueling the inflation of another bubble (think 90s S&L crisis), or inflation balloons and foreign investment, already declining, packs its bags and heads for the hills.  The U.S. has carried a trade deficit since I was born.  I think it's time to realize we need to raise interest rates and let the export industry take it on the chin in order to help the majority (companies that import).  The trade deficit partnered with our currency deficit increases the problems for the U.S.  What will we do when China stops borrowing?  Or, when the dollar is no longer the reserve currency?  I think the negative implications of a weak dollar policy far outweigh its benefits.

I asked for further clarification on what he meant by "I think it's time to realize we need to raise interest rates and let the export industry take it on the chin in order to help the majority (companies that import)." Here is his followup:

The sentence about "taking it on the chin" references basic strong/weak dollar policy.  If the dollar is weak, compared to foreign currencies, this proves to be in an exporter's advantage because he can sell his goods cheaply, due to the fact that foreign countries' purchasing power increases as the dollar weakens.  We know that the U.S. maintains a trade deficit, which signals that our economy is IMPORT heavy.  Hence, it appears, based on trade, that the U.S. has more domestic companies that import than export, making the majority of domestic companies importers and the minority exporters.  By instituting a strong dollar policy, the export companies take a direct hit (also known as taking it on the chin) because they cannot sell their goods as cheaply as before.

My argument is to institute a strong dollar policy to benefit the majority (importers), instead of the minority (exporters).  Not only does the weak dollar policy hurt the majority of the companies, it harms the status of the dollar as the reserve currency because weak dollar policy promotes inflation.  The Fed has expanded its balance sheet by 2 trillion dollars, and it currently practices a weak dollar policy.  Inflation, if not monitored closely, can flame up quickly.  I understand the Fed's motive to promote and thaw the credit markets; however, the liquidity in the market is there, the banks simply are not lending it.  So, the question becomes: when will the Fed cease to flood the market with liquidity?  I don't see an end in sight, and that is discouraging. 

Does anyone have thoughts on this? I have not thought about the strength of the US Dollar, and how that affects our country, much at all. However, at first glance, it's not clear to me that having a weaker dollar is all bad, at least in the short-term. First of all, I don't see any other currency that can legitimately replace the US Dollar as the global reserve currency. Though some countries may diversify into Euros, or other globally respected currencies, the dollar is in my mind still the safest play due to the position of the US economy. This economy is the largest and strongest in the world despite the downturn, and no other country is as of yet ready to take that role. Also, might it not be a good thing for us to start exporting more? This may lead to job creation in manufacturing or services industries, providing both blue- and white-collar jobs that would greatly help the middle-class.
I have written about the inflation scare potential, and it indeed lurks on the horizon. In this, I feel Nick is correct: we will eventually see inflationary issues from all the money the Fed has pumped into the system (note: I wrote that the short-term worry is actually deflation. I should revisit this topic at some point.). That is intentional, as Nick articulates: the Fed is purposefully practicing a weak dollar policy. I also feel the long-term dangers are severe. Though in the short-term, this policy could help alleviate the recession, a long-term weakened dollar doesn't help our country.
I'd love to get some opinions on this weak dollar policy business. Is Nick's premise correct? If so, are the repercussions he envisions, and his preferred response, with merit? Does my response have any merit? Any thoughts on Bernanke's policy in general?