Monday, August 5, 2019

Trump is Going to Flip: China Just Launched a Currency War

China's offshore yuan in foreign exchange trading has weakened below 7 per US dollar.

China's central bank, the People's Bank of China, has set the yuan at 6.9 per dollar. This is the lowest it has been in 11 years.

A decline in the value of the yuan will help offset some of the tariff fees that Chinese exporters to the US face as the weaker yuan will mean a lower price in dollar terms for goods shipped to the US.

President Trump has previously called for a weaker dollar, so he is not going to be happy with this move by the PBOC.

Of course, currency manipulation is complex. If the PBOC sterilized any of its interventions to drive the yuan down by draining yuan from other parts of the system, the weakening yuan will be very short-lived. However, if no sterilization occurred, the new yuan pushed into the system will put upward pressure on Chinese price inflation.

This is just one more reckless economic policy move by China. China should treat Trump's tariffs with benign neglect and remove all tariffs on US goods and halt the foreign exchange intervention.

Open markets is the best way to deal with confused trade mercantilists such as Trump.


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