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NEW YORK — The yen shot to three-week highs against the dollar Thursday, after the People's Bank of China dumped its dollar peg in favor of one tied to a basket of the world's leading currencies.
The move allowed China's yuan to gain some 2% against the dollar, with many of Asia's currencies tugged higher as a result of trade relationships. China's decade-long dollar peg put its currency most recently at 8.28 yuan per dollar.
The clearest beneficiary of the change is the yen as Japan should receive a double benefit from this action by harvesting more revenue from its sales to China — its primary trading partner — as well as see its goods become more competitive against their Chinese counterparts in the global markets, said Boris Schlossberg, currency strategist at Forex Capital Markets.
Malaysia also announced it was adjusting its ringgit from a peg to a limited float.
The dollar's tumble against the yen — the greenback was at 14-month highs against its Japanese counterpart Wednesday — translated into broad declines for the U.S. currency.
The dollar was down 1.7% at 110.85 yen in morning U.S. trading. The dollar fell 0.1% against the euro, with one euro fetching $1.2148.
Refco currency analyst Mike Malpede said the timing of the announcement was somewhat surprising, noting that the U.S. had called for the change by the end of August.
The Chinese central bank announced the daily trading price of the dollar vs. the yuan will continue to be allowed to float within a band of 0.3%, while the trading prices of non-U.S. dollar currencies will be allowed to move in yet-to-be announced bands.
"The People's Bank of China will make adjustment of the RMB exchange rate band when necessary according to market development as well as the economic and financial situation," the central bank said in a statement.
"The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies," it said.
China's move was widely viewed as a first step in a gradual change in the overall peg.
"In the bigger picture, this is just a beginning of probably a series of moves," said Ronald Simpson, an analyst at Action Economics.
"China just wanted to gauge what the market reaction was going to be, and when things stabilize, they'll adjust the peg on several more occasions going forward."
Malpede said the yen could rally further, but it was possible that the Japanese central bank or others could intervene to halt the rise. A richer yen could make Japanese exports, a large driver of its economy, less competitive on world markets.
"The decision is positive for the yen and for global equities," he said.
On the political side, the decision is a "tremendous symbol" that will take political pressure off China, added Forex Capital Market's Schlossberg.
U.S. politicians have argued that the undervalued currency gave an unfair competitive advantage to Chinese exporters.
China was also charged with placing a toll on the U.S. trade balance; the trade deficit with China widened 7.1% to $15.8 billion in May vs. April.
The change will allow the yuan to rise or fall along with changes in the dollar against other major currencies.
Treasury Secretary John Snow had warned China that if it didn't move on its currency by mid-October, the White House was prepared to name China as a currency manipulator, a move that might have led to trade retaliation.
Congress had threatened to pass a bill proposed by New York Democratic Senator Charles Schumer to slap a 27% punitive tariff on imports of textiles from China.
But Simpson at Action Economics, said China's move-significant but well short of U.S. calls for at least 10% — is unlikely to satisfy the calls from the U.S. Congress, which will intensify with the approach of the September visit to Washington by President Hu Jintao.
"I can hear it now. Probably U.S .lawmakers are going to come out today and said they're very disappointed by the move and that it wasn't nearly enough," said Simpson.
U.S. Senator Chuck Schumer said China's move is smaller than they had hoped but is welcome.
"This is a good first step, albeit a baby step, Schumer said.
"The most significant thing about this move is that the Chinese in effect have conceded that pegging their currency is bad for China, for the world economy, and for the U.S., and we are glad they have come to that understanding," he said.
But the Senator added "if there are not larger steps in the future, we will not have accomplished very much."
Senators Schumer and Lindsey Graham will hold a press conference later in the day to react to China's decision.
Elsewhere, the dollar had scant reaction to a positive employment indicator as the China revaluation and the unfolding events in London grabbed the headlines.
First-time filings for U.S. state unemployment benefits dropped by 34,000 to a seasonally adjusted 303,000 last week, the lowest level in three months, the Labor Department said Thursday. It's the largest decline since December 2002. See full story.
Federal Reserve Chairman Alan Greenspan is expected to repeat to a second congressional committee this week his optimism for the U.S. economy and the likelihood that the central bank raises interest rates further.
FOMC minutes of the June meeting will also be released later in the day.
In Europe, reports said three subway stations in London were evacuated Thursday, just two weeks after attacks on three stations and a bus attacks killed more than 50 people.
Television reports also noted an incident on the Number 26 bus in East London, though the Sky News television channel quoted a bus operator as saying there were no injuries and only shattered glass.
Simpson said the market reaction to the yuan revaluation has begun to stabilize but some choppy trade is still expected.
"The market will try hard today trying to figure out what's the right valuation to put the dollar at against the euro and yen," he said.
BoJ officials are quoted on news wires, saying they welcome China's move, saying it will help make Chinese growth more balanced and sustainable, according to Action Economics.
The MoF's Watanabe said Japan is watching developments closely, and will take action if needed.
Rachel Koning is a reporter for MarketWatch in Chicago. Wanfeng Zhou is a markets reporter in New York.
source: http://www.marketwatch.com/news/story.asp?guid=%7B7FE9467D-9EAD-41CC-9876-ECE7CE249E50%7D&siteid=google 21jul2005
New York — U.S. Treasury notes dropped after the People's Bank of China said it loosened its fixed-exchange rate against the dollar for the first time in a decade, letting the yuan fluctuate versus a basket of currencies.
"It could possibly mean less purchases of U.S. Treasuries from the Chinese government," said Dean Maki, chief U.S. economist in New York at Barclays Capital Inc. "There could be upward pressure on Treasury yields."
The yield on the benchmark 10-year note rose more than 6 basis points, or 0.06 percentage point, to 4.22 percent as of 8 a.m. in New York. The price of the 4 1/8 percent note due in May 2015 1/2, or $5 per $1,000 face amount, to 99 7/32, according to Cantor Fitzgerald LP. Yields move inversely to prices.
China is the second-biggest holder of U.S. Treasuries with more than $243 billion as of the end of May, up from $165 billion a year earlier, according to the U.S. Treasury Department.
Valuing the yuan against more than one currency will allow it to appreciate or decline as the dollar gains or drops versus other currencies. Until now, it has been pegged at about 8.3 per dollar, earning criticism from U.S. Treasury Secretary John Snow, Federal Reserve Chairman Alan Greenspan, German Finance Minister Hans Eichel and his Japanese counterpart, Sadakazu Tanigaki.
'Headline Event'
"The timing was more of a surprise," said David Ader, head of U.S. government debt strategy at RBS Greenwich Capital Inc. in Greenwich, Connecticut. "It's a headline event."
News of the revaluation reached traders at about 7 a.m. New York time as many were just settling in.
"It caught the market flat-footed," said Gregg Cohen, a government bond trader in New York at Cantor Fitzgerald LP. "I was drinking my coffee, looked up and the market was falling out of bed."
Treasuries gained for a second day yesterday after Greenspan told a congressional committee that the economy is "on a firm footing," while inflation is tame. Inflation erodes the value of the fixed payments offered by bonds. The remarks by Greenspan, who speaks again today, helped push the yield on 10- year notes to the lowest in almost a week.
"Ultimately bonds are determined by inflation and inflation is low and there are no signs it's going to pick up," said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in London.
'Well-Contained'
Greenspan told the House Financial Services Committee in semi-annual testimony on the economy that inflation "continues to be well contained." He is scheduled to testify to the Senate Banking Committee at 10 a.m. in Washington today.
The Conference Board will probably say its index of leading U.S. economic indicators gained 0.5 percent last month, from a 0.5 percent decline in May, according to the median forecast of 57 economists in a Bloomberg News survey. The Conference Board will recalibrate its index starting today to reduce false warnings bout economic slowdowns.
The Philadelphia Fed will report today its regional factory index rose to 10 in July from minus 2.2 last month, according to the median estimate of 52 economists. Manufacturing growth in the region contracted in June for the first time in two years as energy costs rose. Readings greater than zero signal growth.
source: http://www.bloomberg.com/apps/news?pid=10000103&sid=aVKj9_V6p9Bk&refer=us 21jul2005
WASHINGTON — Bowing to intense pressure from Washington and its G-7 allies, the Chinese government on Thursday announced the first step towards revaluing its currency.
In a statement the People's Bank of China said it is dropping its yuan-dollar peg in favor of one vs. a basket of currencies. The government also lifted the value of the currency by more than 2%.
"The People's Bank of China will make adjustment of the renminbi exchange rate band when necessary according to market development as well as the economic and financial situation. The renminbi exchange rate will be more flexible based on market condition with reference to a basket of currencies," it said.
China said it's adjusting the exchange rate to 8.11 yuan per dollar; overnight, the dollar traded at 8.2765 yuan overnight.
The yen surged and the dollar slid after China announced its currency move. See full story.
"It's a small move. It's a token. It is not going to have much immediate economic effect," said Robert Brusca, chief economist at FAO Economics.
"But it sets things in motion," he said, noting that Malaysia has announced it will end its peg and adopt a managed float, with the MYR's value managed against an undisclosed reference basket.
"The significance of this move is dependent on what China does next. They've lifted the lid on the expectations," Brusca said.
Economists said the key for further movement is how the U.S. political system reacts.
The United States welcomed China's move to a more flexible foreign exchange rate.
"China's full implementation of its new currency regime will be a significant contribution toward global stability," Treasury Secretary John Snow said in a statement. He said U.S. officials will "monitor" China's managed floating exchange rate "as their exchange rate moves to alignment with underlying market conditions."
Sen. Charles Schumer, Democrat of New York, a key critic of China's currency regime, called China's move to a basket of currencies "a good first step albeit a baby step."
"If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome," Schumer said.
The daily trading price of the dollar vs. the yuan will continue to be allowed to float within a band of 0.3%, while the trading prices of non-U.S. dollar currencies will be allowed to move in yet-to-be announced bands, it said in a statement released on its Web site.
Members of the U.S. Congress have long complained that an artificially low yuan has boosted Chinese exports and hurt U.S. manufacturers.
The Treasury and G-7 have been concerned that China's dollar peg was limiting foreign exchange market adjustments to the large U.S. current account deficit.
Steve Goldstein is MarketWatch's London bureau chief. Greg Robb is a senior reporter for MarketWatch in Washington.
source: http://www.marketwatch.com/news/story.asp?guid=%7B7FE9467D-9EAD-41CC-9876-ECE7CE249E50%7D&siteid=google 21jul2005
BEIJING — China announced Thursday its currency, the RMB yuan, will be traded at a rate of 8.11 to the US dollar starting 19:00 Thursday, and the yuan to US dollar pegging system is switched to a basket of foreign currencies.
Over the past few years, the Chinese yuan has been pegged to the US dollar at the rate of one dollar for 8.27 yuan, the latest move revalues the rate by 2.1 percent.
The central bank said starting from July 21, it will publish the trading rate between the RMB and major foreign currencies at the closing of daily market trading, and the announced rate will be used as the central parity for the following trading day.
The central bank said the move marks the start of building a more resiliently managed floating RMB exchange rate mechanism which is based on market supply and demand and is adjusted in relation to a basket of major foreign currencies.
The announcement said the trading price between the dollar and the yuan at the inter-bank foreign exchange market will float within a 0.3 percent band around the official central parity, while the trading price between the yuan and non-US dollar currencies will float within a certain range around the official central parity.
The central bank will readjust the floating band at appropriate times according to market development conditions as well as economic and financial situations.
"The RMB exchange rate will be more flexible based on market condition with reference to a basket of currencies," the announcement said, claiming that the central bank is responsible for maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level, so as to promote the basic equilibrium of the balance of payments and safeguard macroeconomic and financial stability.
source: http://news.xinhuanet.com/english/2005-07/21/content_3250088.htm 21jul2005
LONDON — The dollar slid back against the yen after the Chinese central bank announced that it will drop the yuan's 11-year peg to the dollar in favour of one against a basket of currencies.
Under the new exchange rate mechanism, one dollar is valued at 8.11 yuan compared to the old rate of 8.2765 yuan, effectively a 2 pct revaluation.
The trading band which allows the yuan to move 0.3 pct either side of the mid-point is unchanged, the central bank said.
The central bank did not disclose the contents of the new basket. Non-US dollar currencies trading against the yuan will be allowed to trade within certain bands, the central bank said without elaboration.
China had been under tremendous pressure to tweak the currency regime as the old rate kept the yuan deliberately undervalued at the expense of its trading partners.
The revaluation of the yuan would likely raise the value of Asian currencies, including the yen, against the dollar.
The dollar slumped to a low of 110.39 yen following the announcement from 112.40 before. It was lower against the euro, pound and Swiss franc.
Dealing floors were caught unawares by the news although speculation about a change in the Chinese forex system has been circulating for some time.
Paul Bednarczyk at 4CAST said the announcement suggests that the yuan-dollar rate may continue to be adjusted.
'It looks like a creeping level,' he said.
If this is proven correct, the dollar can be expected to drop further.
Sutherlands analyst Stuart Thomson said China has opened up a 'Pandora's box to future revaluations' and will be under more pressure to make further substantial revaluations in the months and years to come.
China's move has also reminded the market about the dollar's bearish long-term outlook, said Thomson, even though the move is too small to have any impact on bilateral trade deficits with the US.
'It remains to be seen whether this cynical ploy is enough to deflect protectionist sentiment in the US, but it will certainly have no impact upon the burgeoning bilateral trade surplus because it will not dent the relative unit labour cost differential,' he said.
Whatever China does, the revaluation is expected to bring about a string of revaluations across Asia.
Malaysia was the first to join in by announcing that it will follow China's example and peg the ringgit to a basket of currencies as opposed to the 3.80 myr to the dollar it was pegged at previously.
pp/ss/har
source: http://www.forbes.com/markets/feeds/afx/2005/07/21/afx2150672.html 21jul2005
China announced suddenly its long awaited change to its currency policy, saying it will no longer peg the yuan to the U.S. dollar but instead let it float in a tight band against a basket of foreign currencies.
The yuan has been strengthened, effective immediately, to a rate of 8.11 yuan to the U.S. dollar — compared to the 8.28 yuan it has been set at for more than a decade. The new trading regime will begin Friday, the government said in an announcement on state television.
The yuan will now be allowed to trade in a tight 0.3% band against a basket of foreign currencies, the government said. It didn't say which currencies. It said the central bank would announce the yuan's closing price each day, and that rate would be the midpoint of the next day's trading band.
The Bush administration on Thursday praised China's decision but said it planned to monitor the country's implementation of the new arrangement. "I welcome China's announcement today that it is adopting a more flexible exchange rate regime," Treasury Secretary John Snow said in a statement. "As we have said, reform of China's currency regime is important for China and the international financial system."
The White House also hailed the announcement. "We are encouraged by China's announcement today that they are adopting a more flexible market-based currency system," Bush spokesman Scott McClellan said.
Malaysia Also Moves
Malaysia's central bank announced minutes after the news was reported that it too would loosen its currency regime, abandoning the ringgit peg to the dollar, in place since September 1998. Malaysia also will adopt a managed float regime.
Carl B. Weinberg, chief economist of High Frequency Economics, issued a report saying he estimated the complex change as a 2% revaluation against the dollar — well below the 10% called for by some analysts and American policy makers. Mr. Weinberg wrote that it "is unlikely to affect the U.S. trade deficit with China ... or any of China's trade flows or economic conditions at all." Mr. Weinberg called it "a nice token move, but it is no economic knockout."
The resolution of the yuan problem removes one of the main thorns in U.S.-China relations. But others remain. Earlier this week, the Defense Department issued a harshly worded report suggesting China was on the way to becoming a military rival to the U.S. On the trade front, the U.S. continues to press China to crack down on rampant copyright and trademark piracy, followed by ongoing friction over the textile and apparel imports. The U.S. also has issues with China's military buildup, its human-right record, and its lack of freedom of worship, all of which will be touched on when Deputy Secretary of State Robert Zoellick travels to Beijing in early August for the first in a series of "strategic dialogues" between the two countries.
China's policy of tying its currency to the U.S. dollar has long been a flashpoint in the administration's international economic policy, with President Bush and his economic team trying to balance diplomatic prudence towards a growing world power with fierce domestic pressure from workers and business executives who blame Beijing for their woes.
China Moves at Own Pace
The Chinese yuan first appeared on the Bush administration's radar screen shortly before the Sept. 11, 2001, hijackings. Then-Treasury Secretary Paul O'Neill traveled to China, ready to press the Chinese to float the yuan. Mostly it was a reflection of his economic philosophy; economies work better when key ingredients, such as the exchange rate, are set by the markets, he felt. After closed-door discussions, Mr. O'Neill left persuaded that the Chinese authorities already intended to move in that direction — at their own pace.
"I'm convinced they'll take whatever actions are appropriate, and it's not something we can really help them with," Mr. O'Neill said.
The issue quickly became swamped by the uproar that followed the Sept. 11 attacks, and Treasury focused its energy on tracking down the finances of alleged terror groups.
A year later, Chinese Finance Minister Xiang Huaicheng ruled out the possibility that China would switch to a floating exchange-rate system any time soon. "Personally speaking, the direction of our currency system is toward the floating system. But in the foreseeable future, it is impossible to fully liberalize the currency system," Mr. Xiang said in the joint press conference in Washington after meeting with Mr. O'Neill.
The Treasury secretary seemed unconcerned that China's position on the currency would sully U.S.-China relations. "Do I see it as the complication? The answer is no," Mr. O'Neill said, according to press reports at the time.
Factory Owners Persisted
But American factory owners refused to let the matter drop. During the early years of the Mr. Bush's first term, the National Association of Manufacturers had pounded the administration over the general strength of the U.S. dollar. As the greenback slipped, however, and Mr. Snow took over from Mr. O'Neill, they shifted their focus to Asia. In early 2003 NAM and its allied companies launched a campaign to get the White House and Treasury to put pressure on China and other Asian nations to stop keeping their currencies artificially weak against the dollar. In NAM's view, China, which had held the yuan at 8.28 to the dollar since 1994, was cheating on the exchange rate to steal markets from U.S. firms.
"The first thing is for the U.S. to begin expressing its concern and displeasure over the fact that other countries are keeping their currencies from adjusting," Frank Vargo, the association's vice president, said as the group unveiled its lobbying campaign.
Mr. Snow adopted a quiet approach, in part for fear that rushing China along towards a free-floating currency could damage its already weak banks. Lawmakers, business executives and Democratic presidential hopefuls, however, focused their fury in China.
Mr. Snow visited China in early September 2003. Even before he arrived in Beijing, the Chinese central bank issued a release saying, "We will keep the yuan stable according to the current policy," while a government-owned newspaper complained about "international browbeating."
The administration clearly felt that it couldn't appear too passive. "The establishment of flexible exchange rates, of a flexible exchange-rate regime, would benefit both our nations as well as our regional and global trading partners," Mr. Snow told reporters in Beijing. "That's really our central point — that floating rates, market-based, flexible exchange rates create the signals for a well-functioning flow of resources on a global basis. There ultimately is no substitute for that."
The next day, President Bush himself chimed in, telling an audience of business people in Kansas City, Mo., "We don't think we're being treated fairly when a currency is controlled by the government. We believe a currency ought to be controlled by the market, it ought to reflect the true values of the respective economies."
The sharpened rhetoric won the administration a short reprieve from the NAM, which praised both Messrs. Snow and Bush. "But we were not satisfied at the Chinese government's response to these appeals, which suggests continue delays in correcting the problem," Jerry Jasinowski, NAM president, said after Mr. Snow returned from China.
And trade hawks on Capitol Hill seized the moment to exert their own pressure on both China and the Bush administration. Just days after Mr. Snow left Beijing, Sens. Chuck Schumer (D., N.Y.), Lindsey Graham (R., S.C.) and others introduced a bill that would impose a whopping 27.5% tariff on Chinese goods entering the U.S. — the amount the senator said was necessary to counter the advantage conveyed by the undervalued yuan.
"The time for diplomatic niceties has passed," Sen. Schumer told Mr. Snow at a Senate hearing. "The administration needs to grow some backbone and take a firm line with the Chinese on the currency issue."
The administration maintained the rhetorical pressure for a few months. Mr. Bush raised the subject with Chinese President Hu Jintao at an economic summit in Bangkok in October 2003. Other senior administration officials joined the chorus. But Treasury, if not the White House, was careful not to promise that a rising yuan would reduce the U.S.-China trade deficit or create American jobs. Instead, Treasury officials argued that such a move would be good for China and give it more control over its own monetary policy. And the administration declined to label China a currency "manipulator" in its semiannual report on currency practices around the world.
"By letting China off the hook, the Bush administration has made itself an accessory in the economic crimes being committed against our workers," Sen. Joe Lieberman (D., Conn.), then running for president, said at the time.
'Coalition of the Raging'
The political heat led Robert Kapp, president of the U.S.-China Business Council, a group representing American companies with investments in China, to label those lobbying for a get-tough policy the "Coalition of the Raging."
The Chinese, in the meantime, continued to promise reforms in the vague future. "With the role of the market becoming increasingly important, the exchange rate …will be finally determined decisively by the market forces and have great flexibility," Zhou Xiaochuan, governor of the Chinese central bank, said in October.
During 2004, the administration toned down the rhetoric, and emphasized its decision to send a team of technical experts to help Beijing pave the way to a flexible exchange rate system. The idea was to keep the issue low key and professional, while the Chinese took steps to strengthen their banking system and otherwise prepare for a freer movement of capital across their borders. Mr. Snow appointed a special envoy to China.
In February, the U.S. and its major allies in the Group of Seven issued a statement pointedly urging China to make its currency more flexible. It was an intentional effort on the part of the U.S. to shift the yuan issue into the international arena, so the Chinese wouldn't feel that any policy change amounted to a humiliating surrender to U.S. bullying.
"That was part of a broader effort to make it clear this is a bigger issue than just the bilateral relationship between the U.S. and China," recalls Treasury spokesman Tony Fratto. "It's a global issue."
The discontent in Congress, fueled by unease among manufacturers and their employees back home, would not subside, however. In April 2005, the Schumer-Graham tariff bill won overwhelming support in a procedural vote, a sign that the Senate might be prepared to lend its support to the idea of punishing China with high import duties. A vote on the full bill was scheduled for this month.
The protectionist sentiment on the Hill alarmed the president's economic team, and administration officials ratcheted up their rhetoric once again. "We're pressing China … for floating her currency, so we can have free and fair trade with China," Mr. Bush told a group of newspaper editors.
Senior U.S. officials took the opportunity to announce that China had done enough preparatory work, and that the time to act had arrived — a significant shift in tone. Even as they tried to fend off protectionists on the Hill, they used the threat of congressional action to prod China to loosen the yuan's links to the dollar. "We're not happy with the current situation," one Treasury official said then. The Chinese "need to find the political will to move."
The administration never specified exactly what steps it wanted China to take, except to say that they should be of a "manner and magnitude" sufficient to signal a move towards flexibility. Mr. Snow was careful to say that he did not think China should immediately cut the yuan completely loose of its moorings. A significant revaluation might have been an acceptable start to the U.S., or a peg to a basket of foreign currencies. Even a wider trading band or a gradual crawl upwards might have won U.S. support.
This summer, Mr. Snow became increasingly convinced that the Chinese were on the verge of taking action, although he still didn't know when or how Beijing would move. "I believe that our longstanding efforts are beginning to come to fruition and we are making progress toward achieving this goal," Mr. Snow said.
As the date of a new vote on the Schumer-Graham tariff bill approached, Mr. Snow and Federal Reserve Chairman Alan Greenspan persuaded the senators that the Chinese were more likely to act soon if the Senate stepped back from its brinkmanship.
The senators agreed in July to withdraw their request for a floor vote. "If we can get there by persuasion and accommodation, so much the better," Sen. Schumer told reporters.
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