Renewed discussion of target ranges for exchange rates and the continuing large US external deficit raises the question whether exchange rates are sustainable at near current levels. This issue is explored here in the context of US macroeconomic adjustments. The real exchange rate of the dollar, using a measure which includes developed and newly industrialized countries (see Figure 1), is today broadly at the level of the 1970s through to 1980 when the US external balance showed a surplus. This position of the dollar offers a starting point for discussing whether the dollar needs to depreciate further. We shall conclude that this is,