The rocky road ahead: China, the US and the future of the dollar.

The future of the dollar depends partly on China and the US being able to effectively manage the tensions arising from the large bilateral trade imbalance and the build-up of foreign exchange reserves by China. We argue that these tensions are unlikely to change over the medium term. While tensions can be managed, the possibilities for miscalculations and policy errors are significant given the complex, and sometimes inconsistent, interests of both countries' policy-makers. In fact, China faces its own form of a 'trilemma' and the ability of the US to exercise its monetary power by shifting the burden of adjustment onto China is uncertain. Given this, and volatile international financial markets, miscalculations which might result in a collapse in the value of the dollar affecting its role as an international currency become a real possibility. [ABSTRACT FROM AUTHOR]