Stable exchange rate is definitely not desirable.  Stable purchasing power of a bitcoin is though, i.e. no excessive infaltion or deflation... Made the following post elsewhere but it got buried, it's appropriate to this discussion so will repost:

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The hard limit on supply of bitcoins is the biggest problem IMHO.  The deflationary spiral threat is well documented so I won't repeat it except to point out that it gives bitcoin far more characteristics of an asset rather than a currency and provides a disincentive for circulation.

Monetary policy should be internally regulated and dynamic.  I'd propose something along the lines of a feedback loop where the rate of coin generation is proportional to the incentive to hoard coins.  Thus if you have excessive deflation more coins are produced, if you have inflation less coins are produced.  The hard limit would disappear and the real world value of the coins stays relatively stable.  The difficulty is that you can't tie it to any externality like exchange rates because then you need gateways to those externalities which creates points of potential manipulation.

My first thought was to tie it to the inverse of the rate of circulation which is easy for any node to calculate.  The more people are hoarding, the more new currency is added to the market thus devaluing the hoarded currency or at least finding an equilibrium and removing the hoarding incentive.  But that would need to balanced with a disincentive to spam transactions or the rate of circulation could be manipulated (and probably choke the network if the effort was big enough).  My next thought is to tie it to the number of unique coins that have been transacted in the block (or the average of the last n blocks) compared to the total generated.  Each coin can only be counted once no mater how many times it is transacted thus preventing spamming with circular transactions to manipulate the rate.  Very large holders could still have an effect by ensuring their coins were moved at least once every block so perhaps it could actually be a one way test:

if circulation > threshold --> create normal number of new bitcoins
if circulation < threshold --> create normal number of new bitcoins + (threshold - circulation) * factor

Obviously not a fully fleshed out idea but hopefully greater minds can add to it...

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