Wednesday, May 12, 2010

China’s Currency Quandary

U.S. government officials, backed by members of the business community and labor unions, have repeatedly called for China to revalue its currency, the yuan, against the dollar. The most recent revaluation began in mid-2005, as the yuan appreciated from US$1=8.28 until it reached US$1=6.83 in July 2008, where it has since remained.

Although the yuan has remained linked to the dollar, it has risen sharply against the euro. On December 3, 2009, €1.00 was worth $1.52. On May 11, 2010, it had depreciated to $1.27. Gains in the dollar against the euro has pulled China’s yuan up with it. Europe is China’s largest export market, accounting for 19.7 percent, about $236.3 billion, of China’s total exports in 2009. If China revalues its currency against the U.S. dollar, it would mean further appreciate of the yuan against the euro, thereby damaging its competitiveness in its largest export market.

When taking the euro-dollar exchange rate into consideration, it’s easy to understand China’s resistance to revaluing the yuan against the dollar.

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