The U.S. Government Can Do Something About the Exchange Rate with the Yuan

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Friday, 30 April 2010 05:03

New York Times columnist Floyd Norris told readers that: "China ties its currency to the dollar, and despite American jawboning, there is little that the United States can do about that." Actually, the U.S. government is free to set its own higher exchange rate of the yuan against the dollar.

The Chinese government sets an exchange rate puts the value of the yuan at approximately 14 cents. There is nothing that prevents the Treasury of offerring to buy yuan at a higher price, for example 20 cents. If the Treasury made this commitment and was prepared to stand behind it, it would like raise the value of the yuan to 20 cents. This competing exchange rate would be highly unusual, but there is nothing that literally prevents the U.S. government from doing it.