Chinese Yuan May Make Big Gains in 2008

The Chinese Yuan may make big gains in 2008 as the Chinese government increasingly makes comments about the fall of the US Dollar and seems prepared to protect their huge forex and US Dollar denominated investments.

“If the [U.S.] federal funds rate continues to fall,” said the director of the Chinese foreign exchange administration, Hu Xiaolian, “this will certainly have a harmful effect on the U.S. dollar exchange rate and the international currency system.”

China is reported to have $388 billion in U.S. Treasury securities, as well as hundreds of billions of additional exposure in other US Dollar holdings. Of course, Hu Xiaolian and other Chinese officials are worried that the Dollar may lose additional value in 2008.

The dumb ditter heads in the US congress and those at the US Treasury Department complained for years about the Chinese “manipulating” their currency, the Yuan, by floating it with the US Dollar. Under US pressure about two years ago the Yuan was allowed by the Chinese to trade in a narrow band. When the band was initiated US officials still complained about what they viewed as an artificial weak level for the Yuan at just over eight Yuan for one US Dollar.

Yesterday the Yuan reached 7.3383 to one US Dollar. However, the important thing is that the Yuan strengthened by 0.37% overnight. This was the biggest one day gain for the Yuan since the Chinese central bank altered the Yuan’s Dollar peg. This large of a movement in one day indicates that the Chinese may be about to give the fools in Washington what they have been lobbying for.

A Yuan allowed to float within much wider bands will probably quickly gain strength against the US Dollar. If that occurs it may be just the thing to send the Dollar into a free fall that will bring disaster to the US. It could easily lead to an early and swift demise of the US Dollar as a premier reserve currency.

One had best be very careful of what you say you want. The Chinese may just give it to you if you are a Washington, D.C. fool. The Chinese Yuan strengthening story may just turn out to be the currency story of them all in 2008. If the Yuan takes off for higher ground it will very likely pull the Japanese Yen, the Thai Baht, and other Asian currencies along for the ride, all at the expense of the Dollar.

The days of the Dollar as the world’s premier foreign exchange currency, which for years has allowed the US to follow a policy of spending much more than it takes in,  may be about to come to an end.

If that turns out to be the case then Americans are going to have a hard time of it as they are forced to live within their means. That means a reduction in living standards for US citizens.  There will be hell to pay in Washington as angry Americans increasingly turn on a government that no longer has the unlimited ability to bail them out of difficult financial situations. 

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!