China recently announced that they would allow the Yuan’s trading band to increase from .5% to 1%. This means that the Yuan can fluctuate as much as 1% in any one day of trade. U.S. Treasury Secretary Timothy Geithner called this “significant” and “promising.”
What it means is that China’s taking another step towards allowing the Yuan to trade freely on the open markets. While the U.S. has been pining for this for years, they should heed the words to “be careful what you wish for; you may get it.”
Why? Because China has been steadily making moves to take the U.S. dollar out of trade. They’ve made agreements with Russia and a number of other countries where trade will be conducted in Yuan instead of dollars. If the U.S. continues to print and borrow money at the current rate, more countries will start looking for an alternative to the dollar – and the Yuan, backed by the 2nd largest economy in the world, would be first in line.
If our government officials have the courage to stop the financial bleeding we could easily reverse this trend, but I fear they’re too deeply entrenched in “kick the can down the road” mode.