China Devalues Yuan 2 Percent
China devalued its currency last night in a sign that the country’s economic outlook is dim. The action by China could delay the timing of the Federal Reserve’s expected US interest rate hike which would have an effect on the stock market and gold and silver markets domestically.
The Fed might look first and foremost at domestic economic data instead of trying to conjecture what is going on in China, however, which would mean no major changes to their economic policy. The one time depreciation on Tuesday of 2 percent reverses that currency’s plight of two years. Stock market turbulence in recent months
The move in China marks the biggest one-day fall since a massive devaluation in 1994.
“I think it’s screaming that China is in trouble. … The Chinese leadership is really starting to run scared,” said Schlossberg, managing director of foreign exchange strategy at BK Asset Management.
The stock market in China has been soft. The Shanghai composite increased 80% in 12 months, but plunged 23% since June 12. Wall Street anticipated a rough Tuesday morning with the US stock market Monday broke a seven-session losing streak.
The Chinese central bank said it was striving to make the state-controlled exchange rate more market-oriented. The yuan strengthened alongside the dollar.
The bank said it was carrying out reforms and that meant, starting Tuesday, its daily fix would take into account supply and demand. Washington has asked this of Beijing numerous times.
The bank said it had to devalue because the yuan has been rising despite that market forces show it should have fallen. The yuan has increased because it is tied to the US dollar which has increased in price.
Currencies of other developed countries have decreased in value. This has hurt Chinese exporters by making goods more expensive abroad.
US policymakers will have to consider what China’s move means for them. A weaker yuan makes Chinese exports more competitive. Tuesday’s 2 percent decline with every bit of relief from price pressure helping Chinese exporters. China has recently wanted its price to rise. Its domestic and international goals mean a stronger yuan is best. A main reason for China’s move is likely a strong dollar.
The move is undoubtedly good for gold and silver prices and in the next one to three years it is likely we will see the major effects of this market move by the government in China.