The Worldwide Currency Downward Spiral Continues

As the recession eats jobs worldwide, governments will start to devalue their currencies in order to fight for exports and export related jobs.  The economic growth of China is reliant on exporting and the Government of China is reliant on a growing economy to keep their workers from not having ‘a chicken in every pot.’  Out of work people are more likely get angry with a government that promises jobs and start rocking the boat.

This sort of move has just occurred as China is moving away from its currency peg to the U.S. dollar.  With this peg removed the yuan is expected to move lower against the dollar and Chinese products will become cheaper in the United States.  This will keep or create jobs in China while jobs of U.S. domestic producers of the imported goods will see their products become less competitive as far as price is concerned. 

China is making this move in response to the dollar’s recent strength against the euro which kept the dollar pegged yuan strong against the euro.  This resulted in Chinese exported products becoming less price competitive in the EU.  In the last seven months the euro has plunged in value against the dollar.  This drop is partly a flight to quality as more government debt problems unfold in the EU and investors move to a relatively stronger dollar.  While the dollar could be perceived as being ‘stronger,’ the additional U.S. debt and budget deficits as a result of a large increase in U.S. government spending and borrowing, means that the dollar is weaker than it was but that the euro is even weaker relative to the dollar.

The prices you see for currencies are relative to each other, but these ‘quotes’ do not represent what is really going on.  The euro relative to its past is weaker.  The dollar relative to its past is weaker.  The yuan, which has been pegged to the dollar as the United States is the world’s largest economy, and therefore China’s biggest market, will now be pegged to a basket of currencies in order for the yuan to remain cheap in all worldwide markets.  This keeps Chinese exports cheap and Chinese export related jobs intact (if not growing).

The world has more ‘currency.’  The downward spiral continues.

Monday, June 21, 2010