Question: When inflation and interest rates rise at business cycle peaks, the dollar is likely to decline because foreign investors withdraw assets that are likely to depreciate in real terms because of higher inflation. That helps mitigate the downturn because a weaker dollar boosts exports and reduces imports.
On the other hand, if the economy continues to prosper at full employment without any increase in inflation, more foreign capital is likely to be attracted, hence boosting the dollar and weakening net exports. If other sectors of the economy then weaken, that could exacerbate the recession, as occurred in 2001. To what extent do you think a stronger dollar is likely to cause cyclical downturns in the future?