The value of China’s currency, the yuan, reached a 17-year high yesterday. It was partly in response to the 500+ point drop in the Dow. This furthers weakens the value of the dollar. Why? Because China is America’s biggest banker.
China holds more than $1 trillion in U.S. Treasury bills, bonds and notes. This is one-quarter of the U.S. public debt. This means China does not want the U.S. to default on its debt.
China’s position as America’s banker allows it to directly influence the strength of the U.S. dollar How? China has held Treasuries to buoy up the dollar and keep the yuan low. That allows Chinese exports and labor costs to stay relatively cheap. For the last decade, the U.S. has been pressuring China to raise the value of the yuan to improve the competitiveness of American companies. It looks like the U.S. will finally get its wish.
What It Means to You
A weak dollar will allow U.S. companies to export goods more cheaply. This could strengthen manufacturing, and create more U.S. jobs. Unless, of course, the American manufacturing companies have outsourced those jobs to (you guessed it) China!
A weak dollar will also spur inflation, because imports will cost relatively more. That’s especially true for consumer electronics and oil. That’s probably why oil prices rose a bit today, too.
- Could the U.S. Ever Default on Its Debt?
- U.S. China Trade Deficit
- What Is the U.S. Debt to China?
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(Photo Credit:Chung Sung Jun/Getty Images)