The Chinese yuan has surged to new highs against the US dollar recently, stoking fears that China's export goods will become less competitive on the global stage at a time when the country's economic growth is already cooling.
The yuan rose against the dollar to 6.2417 Thursday afternoon, a record high since China's announcement of exchange rate reform in 2005. And that's just the latest amid a string of intra-day highs recently.
Some have pointed to the ongoing US presidential election season as a cause for the yuan's spike, as the re-evaluation of the currency is seen as an important issue. There are fears that if a new US administration favored pushing hard for yuan reform, a repeat of the sharp appreciation seen from 2005 to 2011 could take place.
However, I think such anxieties are unfounded if we make a wider analysis of recent movements in the yuan and other currencies.
The yuan's recent appreciation has nothing to do with political pressure. Rather, it is a direct result of the weakening value of the dollar owing to the launch of a third round of quantitative easing (QE3) by the US Federal Reserve in mid-September. As QE3 undermined investor confidence toward dollar-denominated assets in the market, it devalued the US currency and thus left space for the yuan to rise against the dollar.
Supporting this is the fact that other major currencies have also risen against the dollar recently, and to a greater degree than the yuan has. The exception is the yen, whose value has been eroded due to market expectations that Japan will take further monetary easing policies. From October 11 to October 17, the British pound increased 0.8 percent against the dollar, the Australian dollar went up 1.9 percent, the Swiss franc rose 1.9 percent and the euro appreciated about 2 percent. Yet, during the six trading days from October 11 to October 18, the yuan's midpoint against the US dollar rose almost 0.6 percent.
The trend will not last as the influence of QE3 gradually fades.
Also, it is natural to see the yuan's sharp yet short-term fluctuations after the Chinese government widened the yuan's fluctuation band against the US dollar in April.
In contrast to the recent upward trend, the yuan fell for seven consecutive days from May 9 to May 17.
At the same time, the short-term rise in the yuan's value will not exert a big influence on China's exports. Currently, China imports most of its raw materials. As the yuan gets stronger, the raw materials will become relatively cheaper, which will largely offset the rise in prices of exported goods in dollar terms.
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