It will be tempted to emulate America's tradition of benign neglect of the currency. This is especially true in light of the European Central Bank's mandate to focus on price stability, which implies the absence of any explicit policy towards the exchange rate. The dollar and euro will provide the bulk of global finance, and large fluctuations between them will be highly disruptive for the rest of the world as well as for the US and European economies themselves. As noted above, both rigidly fixed and freely flexible exchange rates have been tried and found wanting. Fixed rates, unless carried to the extreme of monetary union, as in Europe, or a currency board, as in Argentina or Hong Kong, have proved too prone to degenerate into costly over- and undervaluations.
Flexible rates tend to overshoot wildly and generate equally disruptive misalignments.
For the G7 this goal can best be pursued by maintaining substantial flexibility but modifying the method by which it is managed. For the past decade, the G7 has intervened periodically on an ad hoc basis without prior announcement. However, the interventions have always come long after large misalignments have set in and severe economic damage has resulted. The absence of official guidance has left, indeed led, the markets to drive rates far from their long-term equilibrium levels. Within the wide limits envisaged, the G7 governments could surely agree on ranges that reflect underlying economic reality and are credible to the markets.