China Strengthens the Yuan against the Dollar

Posted by PITHOCRATES - February 12th, 2012

Week in Review

Well, this should please Donald Trump and Mitt Romney.  And others.  Who are hopping mad about China’s currency manipulation making American exports uncompetitive in China.  The Chinese have strengthened the Yuan on the eve of China’s Vice President Xi Jinping’s U.S. visit (see China’s Yuan Rises to 18-Year High Ahead of Xi’s Visit to U.S. by Kyoungwha Kim posted 2/10/2012 on Bloomberg Businessweek).

The yuan traded at 6.2916 per dollar as of 9:42 a.m. in Shanghai, after touching 6.2884, the strongest level since the country unified the official and market exchange rates at the end of 1993. The People’s Bank of China fixed the reference rate at a record 6.2937 per dollar.

Countries like a cheap currency because it makes their exports cheap.  I mean, inexpensive.  And if your economy is driven by exports you definitely want a cheap currency.  Which is why the Chinese have been keeping the Yuan weak.  To boost their exports.  Which they need more than ever what with her export markets wallowing in recessions.  They need to keep those Chinese exports cheap.  I mean, inexpensive.

China is also seeing some price inflation inside their country.  Caused by that cheap Yuan.  And those low interest rates.  So maybe it’s to help battle inflation on the home front.  Or it’s just to shut the Americans up a little on their currency manipulation talk during their state visit.  Whatever the reason, there is now a Yuan stronger than it has ever been in the past 18 years.  The U.S. economy is saved.  Yeah.

Or is it?  Only about 11% of U.S jobs are in manufacturing.  Most of those in aviation.  With Boeing leading the pack in U.S. exports.  So this stronger Yuan will probably do little.  No, it will take more than that to bring back manufacturing to the U.S.  For the U.S. to manufacture all those things the Chinese are manufacturing either the U.S. has to get cheaper labor.  Or China has to get more expensive labor.  Ditto for all that cheap labor in emerging economies around the world.  (Cheap by our standards but rather well-to-do in those emerging economies).  As none of this is likely to happen the stronger Yuan is not going to bring back much manufacturing to the United States. 

Sorry Donald.  Mitt.  And others.


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