Dollar Weakens as Chinese Yuan Revaluation Reduces the Need for Buying

The world turned its focus to the currency market today as China made its second most significant revaluation move in two years. The central bank of China announced this morning that they were widening the trading band for the Yuan, increasing reserve requirements and raising interest rates. The last time China revalued its currency was in July 2005 and just as that move came a week after the US imposed a timetable for Chinese revaluation, this move comes in the midst of the G8 meeting and a week before a Chinese delegation arrives in the US for talks with Treasury Secretary Paulson. This politically well timed move is characteristic of most moves made by China. As a proxy for Asian strength or weakness, the latest announcement has sent the Japanese Yen rallying. It has also sent the US dollar lower since a wider trading band means that China will need to buy less US dollars. The stock markets around the world have yet to react and they may be looking to the Chinese market for clues. The announcement was made after the close of trading in Shanghai, which means that we will need to wait until Sunday night to see how Chinese investors really feel about this triple blow. In the meantime, the US dollar still ends the week stronger against most of the major currencies. The more promising outlook on the labor market has helped to offset the burden of higher gasoline prices and concerns about housing. The US economic calendar next week is light especially in the front end of the week. The only potentially market moving data are durable goods, new home sales and existing home sales on Thursday and Friday.

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