China Signals Increased Currency Flexibility

Fri, Sep 17, 2010

Financial News

Since 2008, China has pegged its currency exchange rate to be fixed to the US Dollar, but those days appear to be over for now. In news that got the attention of forex traders everywhere, the Chinese central bank announced the peg would end but also warned that that a sudden appreciation or revaluation would not be allowed.

While this opens the doors for long term plays on the value of the Chinese yuan, also known as the RMB, skeptics in the U.S. think seeing is believing. Senator Charles Schumer said the statement was vague, and Timothy Geithner, the U.S. Treasury Seceretary, still might release a report detailing Chinese currency manipulation.

This also plays into the value of the U.S. dollar, as China is the largest holder of U.S. bonds, and strengthening its own currency could be the beginning of China slowing down its buying of U.S. debt. A sudden drop in the market for U.S. treasuries could hurt the Dollar, but it is unclear if that will happen for sure.

Overall, this was welcome news for forex investors and the global economy. While there are some issues to watch in terms of the U.S. economy, this could also help balance America’s trade deficit and help the economy that way. It is a clear change in policy that could mark the beginning of a new era in international currency markets. If nothing else, the future developments will be fascinating to watch.

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