Which Direction Is Exchange-Rate Flexibility Headed?

"Which direction is Exchange-Rate Flexibility Headed?" 

Overview

Increasing the flexibility of the exchange rate is critical to ensuring a balance in the global trade environment. This balance leads to greater global financial strength by eliminating the falsities that exist when governments prop up their currency rates. According to a recent G-7 report, “Major economies with inflexible currencies must consider strengthening them if the global economy is to be weaned off its dependence on U.S. spending and Asian savings.” [ (Meier, 2010) ] The independence the flexibility creates for the countries will create greater growth potential.

Current Status of Exchange Rate Flexibility

The main issue currently facing the global exchange rate flexibility is China’s unwillingness to cease and desist with their current philosophy of utilizing a fixed exchange rate for the U.S. dollar. When the economy turned south in 2008, China continued to boost up the value of the dollar. By limiting fluctuation in the market, this is creating a trade surplus for China. Many economists are crediting the depth and length of the recession partly to China’s unfair currency policies. [ (Inoue, 2010) ] On March 17th, the New York Times reported that, “the managing director of the International Monetary Fund, Dominique Strauss-Kahn, also said the renminbi’s exchange rate was too low. “Some currencies in Asia are undervalued, especially the renminbi,” [ (Wassener, 2010) ] China’s economy is benefiting from the current policy by increasing their exports by artificially selling at a lower price than their competitors. This creates an unfair advantage for the Chinese exports and creates an environment that does not encourage competition and free trade.

The U.S., along with several other nations, is pressuring China to adjust their policies to encourage free trade and commerce. China is slowly adjusting these policies but the process is not moving quickly enough. The...