Fed policy creates crunch moment for Chinese yuan

11 August 2011

A weaker U.S. dollar raises the cost to China of suppressing its currency – and will further swell its reserves. Pricier commodities could prompt inflation to return. China has resisted a much stronger yuan, but the Fed’s low interest rate pledge may give it little choice.

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The People’s Bank of China set the yuan’s mid-point at a record high on Aug. 11, prompting speculation that it may be about to alter its policy on the currency, whose value is managed to closely track the U.S. dollar. The yuan has appreciated 6 percent in the last year against China’s largest trading partner, and 6.9 percent since it was released from its dollar peg in June 2010.
The central bank set the yuan’s mid-point at a record 6.3991 against the dollar, which together with a strong fixing on Wednesday, made for a 0.54 percent rise in the mid-point over the past two days.
The U.S. Federal Reserve said on Aug. 9 that “exceptionally low” interest rates in the United States are likely to be warranted at least through to mid-2013. The central bank also left open the possibility of further policy measures if economic conditions deteriorate further.

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