The Yuan gaining Value against the Dollar as the Chinese try to Fight High Inflation

Posted by PITHOCRATES - January 1st, 2012

Week in Review

Currency manipulation is a hot topic.  In the era of central banking and fiat money, the laws of supply and demand determine the value of currencies.  If left to market forces.  But governments everywhere like to interfere with these market forces to give themselves an economic advantage.

A nation must sell their goods in their own currency.  Which means when you’re buying their goods you must first exchange your currency for theirs.  The cheaper their currency is the more of it you will get in exchange for your money.  And the more of their stuff you can buy.  This is why countries want weak currencies.  So they can increase their exports.  And boost their economic output.

The Americans (and others) have claimed the Chinese are a major currency manipulator.  Keeping their currency devalued to boost their exports.  But there’s another side to currency devaluation (see Yuan hits record vs dollar, on track for over-4-percent gain by Lu Jianxin and Kazunori Takada posted 12/26/2011 on Reuters).

The yuan has appreciated 4.27 percent so far this year, with most of the gain being recorded in the first 10 months of the year as China tries to rebalance trade and use the currency to help fight high inflation.

While the government has recently halted yuan appreciation amid slowing exports, it also seems to be wary of a weaker yuan that may lead to capital outflows.

This is the trade off of a weak currency and inexpensive exports.  Inflation.  And high domestic prices.  If you manipulate your currency to increase economic activity (by increasing exports) you will create price inflation.  Making the cost of business more expensive throughout your economy.  Which will reduce economic activity.  It’s a double-edged sword.  And the price currency manipulators must pay.   Sooner or later.

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