Several weeks ago, I wrote in another column that China was not going to be happy with the US Federal Reserve's rate cuts and that they would think about either unloading some of their Treasury Bonds or diversifying out of dollars.
Yesterday, Cheng Siwei, vice chairman of China's National People's Congress told an audience that China was looking to improve the structure of its $1.43 trillion of foreign reserves by favoring stronger currencies. This phrase basically means they are going to sell dollars.
The dollar has already collapsed without China selling and this collapse will only continue and accelerate with China's announcement. It now makes the dollar, once the currency of choice, a global pariah.
The chart below shows how the dollar has fared against the Euro:
The chart looks almost the same for the Canadian dollar. Here what's it looks like against the Chinese Yuan.
The American dollar was fixed against the Yuan until mid-05. Since then, it has begun a descent that will continue.
What does this all mean? It means increased inflation as it costs Americans more to import foreign goods and to travel abroad. It will also help exports and jobs and what remains to be seen is whether this benefit outweighs the pounding our global buying power has taken.
Related Articles:
David Marshall: China's 'Wake-up Call' for American Real Estate by CherylW - Jun 27, 2007
Asia's Long Road Back by JRubinstein - Jun 27, 2007
Putting China in even a small portfolio by DanS - Jun 28, 2007.
