The gradual unwinding of the US current account deficit will force macroeconomic adjustment in industrialised countries as well as rapidly developing countries such as China. One of the key underlying forces driving that change will be the value of the dollar.
This article will briefly review the value of the dollar as reflected by a broad trade weighted index and present the case for the appreciation of the Chinese currency (RMB) versus the dollar as the next round in the adjustment process.
The broad currency trade weighted exchange rate of the dollar is constructed by including currencies, which play a significant part in US exports or imports. An increase in this index indicates an appreciation of the trade-weighted value of the dollar.
This index captures the competitiveness of US goods in comparison to goods produced by its trading partners. It also reflects the foreign exchange value of the dollar in nominal terms. The index is constructed by attributing time varying weights to the nominal foreign exchange values to capture the trade dynamics.
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