U.S. Foreign Exchange and The Chinese Currency Exchange Rate

U.S. Foreign Exchange

The number of international corporations and financial professionals that follow the ever-changing ratio of U.S. dollars to Chinese Yuan has increased and expanded beyond its borders. This is an indication of just how critical the trade relationship that binds the world’s two largest economies has become. Although the relationship between the United States, Canada and Mexico continues to be even more robust than the Sino-American arrangement, the consumer economy of the United States is heavily dependent upon smooth flows of goods from the workshops of China to the Pacific ports of California and Washington State. In many ways, the continued harmonious economic relationship is as important to the United States as modern technological innovations in the financial field (such as the latest trading and communications technologies, see OANDA for more information).

U.S. Foreign Exchange, the Yuan and the Flow of Goods

U.S. Foreign ExchangeThe value of the yuan has a tremendous influence on these flows of goods. Most of the export-ready products that Chinese factories produce for American consumption are low-margin consumer goods that require labor and raw materials to produce. Since these goods must be shipped thousands of miles across the ocean, global fuel prices add a significant and non-negotiable premium onto their final cost. As such, Chinese manufacturers have a keen interest in ensuring that the value of the yuan remains low enough to offset the added expense of bringing their products to market in the United States.

China’s Devaluation of the Yuan

The Chinese yuan used to be pegged the US Dollar to facilitate trade, this ended in 2005. Business deals were still denominated in dollars but [Read more...]

Why (and How) China is Boosting the Price of Gold

The History of Gold Prices (and How We Got Here)

To get the full picture of the current price of gold we have to look back nearly 100 years. In the 1800′s and early 1900′s gold played a key role in international monetary transactions. The gold standard was used to back currencies. Each country determined a fixed exchange rates for its currency, i.e. how many ounces of gold each unit of currency was worth.

Trade imbalances (importing more than they exported or vice versa) could rectified via the exchange of gold reserves. A country with a deficit would have to ship gold to the country with an excess. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend.

Chinese gold coins

old Chinese gold coins—epSos.de (Flickr.com)

However, during WWI and WWII economic warfare was employed in an effort to combat poverty in ones own country by employing a policy called “Beggar Thy Neighbor”. This involved shifting demand away from imports onto domestically produced goods, either through government policy, rather than free markets. The primary vehicles were tariffs (or import taxes), import quotas, or by devaluation of the currency (i.e. changing it’s value in relation to gold). For example, During the 1930s, the British created their own economic bloc to shut out U.S. goods because they felt they couldn’t compete with cheap U.S. goods.

In July 1944, towards the end of the war 730 delegates from all 44 Allied nations gathered in Bretton Woods, New Hampshire. During this conference the U.S. held most of the cards because it was the least financially damaged by the War. The original plan presented by John Maynard Keynes was to establish a world-wide currency called the “Bancor”. Each nation’s individual currency would be pegged to the Bancor (rather than Gold) at a fixed rate. Governments would then be required to buy or sell Bancors in order to maintain the value of their currency at the pegged rate.

However, at Bretton Woods… [Read more...]