Macroeconomics Case Study

US Dollar vs the Yuan

OR

Abstract:
The US has always favoured a 'strong dollar policy'. However, China's currency, the yuan, is pegged to the dollar at about 8.28. The US, through the recent visit of its Treasury Secretary, John Snow, to Beijing, and through the G7 Communique, has spelt out the need for market determined exchange rates. US wants the Chinese peg to be replaced by free float, as pegging has resulted in the relocation of production base to China and a trade deficit with China. The currency peg has helped China to increase employment rates. The yuan is undervalued and so adoption of free float would make it stronger against the dollar. The currency peg has helped China to replace some of Japan's exports to the US. It has also brought more deflation into the already deflated Japanese economy.

Pedagogical Objectives:

• To discuss the importance of currency pegging and its implications on the exports & imports of an economy
• To discuss the need of market determined exchange rates.

Keywords : Yuan, Yen, Monetary Policy Case Study, Renminbi, Dollar, Exchange rate, Interest, Balance of trade, Deficit and surplus, Deflation, Inflation, Current account, Weak, Strong, Imports, Exports