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January 28, 2010

China Yuan and US Dollar News

Wall Street Journal coverage of the G7 meeting and currency discussions

Alan Ruskin, who heads foreign exchange strategy at RBS Securities, notes there is more evidence of a strengthening U.S. dollar than there is to indicating a weakening in the currency. "The dollar's rallied quite sharply. There's a sense that as the U.S. economy is recovering it's hard to conceive of a dollar collapse," he said.

Ruskin said he sees China's recent moves to scale back bank lending as a sign the country could move toward using exchange policies as another tool to tighten monetary policy and fight inflation.

Vice-Minister for Commerce Zhong Shan said in a statement on the ministry's website -

International pressure for the yuan to rise is growing; there are strong expectations for yuan appreciation. Zhong said expectations for a stronger yuan were one of the factors that could weigh on China's exports in 2010, in addition to uncertainties about global economic recovery and trade disputes.

These semi-official comments from a Chinese Minister could indicate that China will move earlier than this summer to begin re-appreciating the yuan versus the US dollar. It could also signal an increased likelihood of something in the range of 10% one off apprecition.



WSJ discusses one off appreciation versus gradual

The 23% surge in China's foreign reserves last year to $2.4 trillion is a much clearer signal that its currency is undervalued.

China rightly worries that a new program of gradual appreciation would only encourage more hot money inflows.

So the alternative is to do it all in one bang. To be sure, a one-off sharp revaluation would strike a major blow at China's export base and induce a significant slowdown in the economy. But since China's competitors would enjoy an exchange rate windfall, contagion would be limited.

Either way, doing nothing and so indefinitely postponing a more violent, involuntary bursting of the bubble is the worst option.




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