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The United States has always favoured a ''strong dollar policy''. However China''s currency, the yuan, is pegged to the dollar at about 8.28. The US, through the recent visit of its Treasury Secretary, John Snow, to Beijing, and through the G7 Communique, has spelt out the need for market determined exchange rates. The US wants the Chinese peg to go as it has resulted in the relocation of production base to China and a trade deficit with China. The currency peg has helped China to increase employment rates. The yuan is undervalued and so adoption of free float would make it stronger against the dollar. The currency peg has helped China to replace some of Japan''s exports to the US. It has also brought more deflation into the already deflated Japanese economy. A structured assignment ''103-061-4'' is available to accompany this case.