Reads to me like they don’t like the yuan strength vs the euro which means it could weaken vs the dollar if they buy euro instead of dollars as suggested below:

China Yuan Pledge Suggests Peg to Dollar May Go

June 19 (Bloomberg) — China’s central bank said it will allow a more flexible yuan after the nation cemented its economic recovery, indicating the currency’s 23-month- old peg to the dollar may be scrapped.

The yuan’s 0.5 percent daily trading band will remain unaltered, the central bank said in a statement on its website today.

“The central bank’s statement means China’s exit from the dollar peg,” saidZhao Qingming, an analyst at China Construction Bank in Beijing. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.”

Allowing the yuan to strengthen may curb inflation by reducing the cost of imported goods and limit the need for central bank dollar buying, which has left the nation with $2.4 trillion in currency reserves. A stronger Chinese currency may also help avert a trade war after U.S. lawmakers urged President Barack Obama to use the threat of trade sanctions to force a policy change.

“The global economy is gradually recovering,” the central bank said today. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the renminbi exchange rate regime and increase the renminbi exchange rate flexibility.”

The central bank was using another word for the yuan. The currency has been trading at about 6.83 per dollar since July 2008.

5 Responses

  1. I don’t get it.

    They buy dollars from their exporters to set the dollar/yuan rate. If they want, they’ll move that rate to depreciate dollars against yuan.

    Now they’ll sell dollars for Euro in the open FX market to adjust their reserves. That may affect the dollar/Euro rate at the margin, but it won’t affect their chosen intervention level on dollars/yuan with their own exporters.

    What am I missing?

    P.S. isn’t a lot of their European trade still settled in dollars?

    1. June 21 (Bloomberg) — Yuan forwards strengthened to a seven-week high after China’s central bank signaled an end to the currency’s two-year peg to the dollar.

    2. June 21 (Bloomberg) — The yuan climbed the most in 20 months against the dollar and forwards jumped after China’s central bank relaxed a two-year peg before a Group of 20 summit this week.

      The currency advanced 0.37 percent to 6.8010 per dollar as of 3:54 p.m. in Hong Kong, the biggest gain since Oct. 7, 2008, according to the China Foreign Exchange Trading System. The 12- month non-deliverable yuan forward rose 1.3 percent to 6.6276, implying traders are betting on a 2.6 percent appreciation.

  2. China’s Central Bank has sought to defuse the huge pressure being built up on China to appreciate its currency.In a statement,the Bank it talks about “reforming the currency”.There is no hard numbers about appreciation or the timeline of the reforms.It would surprise me that China appreciated the currency too soon as its economy is already slowing down.

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