China’s Dollar-Depegging Signal Likely a Bet on More Greenback Strength

December 15, 2015


China’s indication Friday it will loosen its long-time peg to the dollar and instead target a basket of currencies on the eve of an expected U.S. Federal Reserve rate increase is likely no coincidence.

[ by Ian Talley | December 11, 2015 | Wall Street Journal ]

The Fed’s anticipated move next week and further increases in the coming year are expected to pressure the dollar higher against most major currencies around the world.

That’s the last thing Beijing wants as it struggles to prevent its economy from collapsing. A stronger yuan would add another headwind to its travails, weighing on exports.

“They must be expecting the dollar will rise further,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and a former senior Fed official. Pegging the yuan to a basket of currencies wouldn’t by itself depreciate the yuan. But if Beijing believes the greenback’s value will rise against those exchange rates, “then this is a depreciation relative to that future increase,” he said.

Removing the peg amid a strengthening dollar would also mean Beijing wouldn’t have to continue ransacking its foreign exchange reserves to stabilize the yuan’s value, an increasingly expensive task.

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