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Thursday, July 21, 2005

China revalues yuan

CNN Money:

In a move that could trim the trade gap with the United States, China revalued its currency higher against the dollar Thursday and said it would no longer have the yuan tied to a fixed rate against the U.S. currency. The move, while small at this point, could be the first step to reduce competition for some U.S. companies from lower-priced Chinese imports. A stronger yuan could also increase the revenue U.S. exporters get from sales to the world's largest country, one of the fastest growing consumer markets. It also reduces the threat that Congress could impose threatened trade sanctions on China. On the downside for American citizens, it could lead to increased prices for Chinese-made goods such as apparel and electronics.
While this will be good for American manufacturers, I am not sure that it is good for the American economy overall. Simply put, China has been buying dollars for more than they are worth, and America has been the one getting the better end of that deal. Another way of looking at this, is that a big worry has been inflation, which despite rising energy prices has not yet materialized. An increase in the price of Chinese goods, which is basically the entire stock of Wal-Mart, has the potential to tip us into an inflationary cycle.


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