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.