The U.S. Can Unilaterally Lower the Value of the Dollar

Includes: UDN, UUP
by: Dean Baker

The NYT had a useful piece on the exchange rate between the Chinese yuan and the U.S. dollar, however it ignored the fact that the United States does not have to ask China to raise the value of its currency. The United States could unilaterally set a lower value for the dollar against the yuan.

For example, it could announce that it would exchange dollars at the rate of 5 yuan to a dollar beginning at some date in the future. While it is illegal for Chinese firms and individuals to take large amounts of currency out of the country, it is likely that many would be able to evade the law for this sort of profit.

If the U.S. were to offer this exchange rate, it is likely that it would quickly become the effective exchange rate. More importantly, if the United States made clear to China that it was prepared to go this route, then it is likely that China would negotiate a path toward a lower valued dollar.