Monetary policy is like juggling six balls... it is not 'interest rate up, interest rate down.' There is the exchange rate, there are long term yields, there are short term yields, there is credit growth.
The U.S. berates China for its exchange rate policy, which Washington doesn't like. But one-sided pressure on China to change its exchange rate is misplaced.
We have believed for many years, much earlier than anyone else was talking about this issue, that it was in the interest of China to evolve to a more flexible exchange rate system.
In fact, the recent increase in intra-firm trading enables businesses to shift their activities across borders smoothly, thereby strengthening the response of economic activity to exchange rate movements in the long run.
I think partly the decline in the peso was due to worry about renegotiation of NAFTA, but I think we also need to think about some other mechanisms for making the peso/dollar exchange rate a bit more stable.
We are now preparing for the reform of the yuan's exchange rate system. For such reforms to take place, we need good economic conditions... and we need to do it under tight control.
When financial sectors are small and capital is mobile, floating exchange rates spell massive currency volatility. When a lot of foreign capital flows in, a freely floating exchange rate rises sharply, wreaking havoc for domestic banks and exporters alike.
