Economic Viewpoint: Towards Exchange Rate Stability?

At their recent meeting in Washington the Group of Seven reafirmed their desire to hold exchange rates at about their current level. In this Viewpoint we consider the prospects for success. We conclude that although current rates are feasible in terms of competitiveness, the system will remain under strain as long as there are major inconsistencies between jiscal policy in the US and the rest of the world. The present conjuncture of interest rates and inflation points to a further dollar depreciation. It would be better, in our view, to enact this quickly and to attempt to stabilize exchange rates at sustainable levels: the policy of holding the dollar is misguided.