China keeps un­prece­dented in­flu­ence on Fed and US mon­e­tary pol­icy

The Pak Banker - - COMPANIES/BOSS -

Will the Fed­eral Re­serve be­gin to raise short-term in­ter­est rates in Septem­ber given the de­val­u­a­tion of the Chi­nese yuan? What about Oc­to­ber?

It seems less likely to­day that rates will go up in the early fall than this time last week -- and not just be­cause of the econ­omy or the latest la­bor re­ports. This time, it's be­cause of China and the yuan.

The Fed has found all kinds of rea­sons for not rais­ing rates this year. Now, with the pos­si­bil­ity that the U.S. dol­lar will get stronger on its own, a Fed-driven rise in short-term rates would only add to the rea­sons for the value of the U.S. cur­rency to rise. And, the Fed­eral Re­serve may not want this to hap­pen.

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Now, how­ever, the Chi­nese de­value their cur­rency, the yuan, and the world seems to have shifted. Over the past three days, the value of the yuan (for­mally, the ren­minbi) has fallen by only 4.4% rel­a­tive to the dol­lar, but all sorts of at­ten­tion has been drawn to the event through­out the world.

Cen­tral banks, in­clud­ing the Fed­eral Re­serve Sys­tem, are tak­ing no­tice. The Chi­nese want this to be the case.

They want to be­come a big enough player in world fi­nan­cial mar­kets so that oth­ers no­tice what they do. Europe would like to be able to garner this at­ten­tion as well.

This is the whole rea­son be­hind the ef­fort of the eu­ro­zone to cre­ate a strong po­lit­i­cal as well as cur­rency union -- so that it can play at the high­est lev­els in in­ter­na­tional mar­kets.

Oth­ers would like to make it into the big leagues as well. This will change the whole dy­namic of in­ter­na­tional fi­nan­cial mar­kets and in­ter­na­tional pol­icy mak­ing. The Fed­eral Re­serve will have to take no­tice of what the Ja­panese are do­ing with re­spect to the be­hav­ior of the yen.

The Fed­eral Re­serve will have to take no­tice of what the Bank of Eng­land is do­ing with re­spect to the Bri­tish pound. And so on and so forth.

The world of for­eign ex­change is go­ing to be­come in­ter­de­pen­dent in a way that it has not been for a long time.

The In­ter­na­tional Mon­e­tary Fund has cau­tiously wel­comed the Chi­nese de­val­u­a­tion. In the mind of the IMF, the yuan has been too tightly con­trolled in the past and has al­lowed the Chi­nese to be ac­cused of ma­nip­u­lat­ing its cur­rency, keep­ing the cur­rency un­der­val­ued so as to sup­port its ex­port strat­egy.

The ini­tial re­sponse of the IMF has been fa­vor­able be­cause its lead­ers see the move by the Chi­nese as an ef­fort to al­low more mar­ket in­flu­ence over the value of its cur­rency.

In other words, the Chi­nese have gained more fa­vor in the in­ter­na­tional fi­nan­cial com­mu­nity to­ward hav­ing the yuan ac­cepted as another re­serve cur­rency in the world to sit be­side the dol­lar, the Ja­panese yen, the euro, and the Bri­tish pound.

The Chi­nese po­si­tion is caus­ing the Fed to pay at­ten­tion to the value of the U.S. dol­lar in for­eign ex­change mar­kets in a way no one else has in re­cent years.

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