Re: China & The Dollar
Your logic is right if the Chineese really turn their currecy loose which I doubt seriously for many reasons. The WSJ had a good article on the front page today about the new policy. From the article:
China's central bank had for years bought enough dollars to keep the yuan pegged at about 8.28 to a U.S. dollar. In yesterday's move, it let the currency appreciate to 8.11 yuan to a dollar. Now China will limit the yuan's move each day to plus or minus 0.3% against the dollar. It will also allow the yuan to move by a degree it didn't specify against a handful of other currencies independent of its moves against the dollar. The government isn't saying the currency will move every day, or how much it will move over time.
Details of the basket setup will apparently be kept secret, since Beijing didn't say which currencies will be included. At the onset, the U.S. dollar is likely to remain most important. While it isn't clear just how much further China will allow its currency to appreciate, some economists see yesterday's decision as the start of a gradual move up in the yuan. J.P. Morgan Chase predicted the yuan will gain a further 5% by year-end.
Bond market rallied today. A perspective from a trader I respect:
1) China still depends on selling Wal Mart et al alot of crap .......... they can't really afford to have the USD collapse on them and i suspect folks realized that today as well as fact no currencies or %'s in that basket the Chines will peg to were ever ID'd meaning it could be very heavy weighted to USD .........
2) China owns billions in US Treasuries and MBS bonds ........ hurting the USD and driving rates higher in USA would be financial suicide for that position .
3) USA export to China ? ....... maybe lawyers and stockbrokers ? .......... i'm questionable that at the margin , a weaker dollar / stronger Yuan makes alot of American made stuff cheaper than Chinese made stuff ......
4) a stronger Yuan makes oil/copper/steel/etc that much cheaper ........ also makes US companies cheaper too ......... this part of the analysis strikes me as spot on and in part i suspect today why commodities doing OK
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