Aug 23, 2012

Until this year, the Yuan had been steadily appreciating against the U.S. dollar. Since uncoupling in 2010 when it was 6.82 to 1, the Yuan had appreciated to 6.29 to 1. The U.S. had been pressuring China to allow its currency to appreciate so that China would no longer be the “currency manipulator” the U.S. claimed it to be, and China seemed to be slowly letting it happen. (Many politicians have proclaimed that fixing China’s currency exchange rate will go a long way to fix our economic problems… which include borrowing 1.5 trillion per year, and manufacturing wages that are many times that of China’s, but this is another story).

However, recently the Yuan has bounced back the other way from its high of 6.29 to 1; as of today it’s 6.35 to 1. CNBC reports that the reasons given for this are that the Chinese ecomony has been slowing, and their housing bubble popped, causing some of that hot money to leave town.

So far the U.S. response has been muted, but I can’t help but think that there’s sure to be some more mud-slinging in the presidential campaign about China and us taking it too easy on our largest banker. My take is that long term, the Yuan will continue to appreciate against the dollar, not because the Chinese particularly want it, but because the U.S. won’t stop the cycle of borrow and print lots of money, which will eventually lead to serious devaluation of the dollar.

To be continued…