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China's New Yuan Policy Is Bad News for US Dollar

By Sean Hyman   |   Monday, 21 Jun 2010 10:13 AM

China is dropping its pegged exchange rate of 6.83 yuan to the dollar. China did this just ahead of a G-20 meeting that’s been pressuring Beijing officials to do this for quite some time now.

However, in the end, China doesn’t ultimately do something because it has been pressured by the United States (as much as we’d like to think so).

China’s officials are doing this because China is coming out of being an emerging market and turning into a developed nation. China is still in the transition and in its infancy as it becomes a developed nation. As an emerging market, you’re usually a net-exporter and dependent upon capital coming into your country. But there comes a point to where the country develops enough to where it can become a consumer-led economy.

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When this happens, a transition happens within its currency. It’s at that point that the country goes from wanting a weaker currency to one of wanting a stronger currency. You see, if you’re an export-driven economy then you want the cheap currency. But if you’re moving into a consumer-led economy, then you want a stronger currency.

So this is the “real” reason why China is allowing its currency to strengthen for the first time since July 2008. (Also, a stronger yuan will help China fight the growing inflation problem it has right now, too).

Now, since China’s yuan is not fully tradable, the questions are: Who does it hurt and who does it help? More specifically, which currencies will benefit and which will be hurt due to China’s currency appreciating?

The Asian currencies are the ones that will benefit (the Japanese yen, Singapore dollar, Hong Kong dollar, etc.).

Why?

All of these Asian economies have been exporters right along with China.

Therefore, they all needed to keep their currency fairly cheap so that they could remain competitive. However, since China is allowing its currency to strengthen, Beijing can afford to allow the yuan to do the same without harming itself or its exporters.

So who gets hurt by this?

The U.S. dollar gets hurt.

Why?

Since China has scrapped the peg to the dollar, the yuan will strengthen and the greenback will fall against it. Therefore, the dollar will suffer some from a stronger yuan.

All of this “weekend news” of the yuan peg being done away with really caused a jolt in the currency market on Sunday when it reopened.

After I’d wrapped up my Father’s Day fun with my wife and kids, I turned on my currency screens to see how the market would react to this. It reacted just as I’d suspected it would.

The USD/JPY pair gapped lower from 90.73 on Friday to 90.24 instantly on Sunday evening. Meanwhile, EUR/USD gapped higher (on USD weakness) from 1.2372 on Friday up to 1.2450 on Sunday night.

The Singapore dollar, Hong Kong dollar and other Asian currencies strengthened instantly upon the news, too.

I’d look for this trend to continue overall during the coming months too as Asian currencies continue to strengthen against the U.S. dollar.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.


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China is dropping its pegged exchange rate of 6.83 yuan to the dollar. China did this just ahead of a G-20 meeting that s been pressuring Beijing officials to do this for quite some time now. However, in the end, China doesn t ultimately do something because it has been...
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