In principle, I don't see a problem with it, if it's properly executed. It falls well enough within the scope of a school's job, which is contributing as much as possible to a pupil's future well-being. Plus, as someone has already said, they get to decide how you have to meet their standards. Getting kids to exercise who might otherwise not is an attempt to ensure that a sedentary lifestyle they adopt when they are young and lazy does not cause problems for them in the future, when they might otherwise wish their hearts still worked as well and not be able to lift their arms above their shoulders or climb several flights of stairs.
That said, a lot of PE isn't very well done, and it just becomes a stage for jocks to make geeks feel bad about themselves, either willfully or merely by being better. It's best when there are many different options to choose from; people will tend to congregate with similar people, and that can remove the psychological barriers to enjoying whatever it is your doing. Every pupil for whom PE is torture isn't getting what they might otherwise get out of it. Having ultra-competitive pricks in the same class as casual kids and people who are insecure about their bodies just isn't good for anyone.
I know that in my high school, we had exactly zero choice in what we were going to take part in (except one time, for only a couple of classes in a row). I was forced to do all sorts of unpleasant stuff that I wasn't nearly as good at as everyone else, and it was embarrassing to be so physically awkward in full sight of everyone else.
Luckily, I had some friends who, just by being nice people, helped make it more bearable, but I would really have liked more interest-based segregation. Although I admit, while I sucked at everything else and made a fool of myself constantly, I was always a good swimmer, and I did like showing that off.