Yuan-Dollar Peg Loosened for First Time in a Decade
2005-7-21 21:05:52     Bloomberg
China loosened its fixed-exchange rate against the dollar for the first time in a decade, letting the yuan fluctuate versus a basket of currencies, the People's Bank of China said on its Web site.

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.

``This will be a small, but symbolic first step in a long road,'' said Marios Maratheftis, a currency strategist in London at Standard Chartered Plc, a U.K. bank that gets two-thirds of its profit from Asia. ``If there is any flexibility allowed, and until there has been none, then the yuan will strengthen against the dollar. It won't be a huge move, though.'' He spoke in an interview on June 24.

Letting the yuan strengthen may help President Hu Jintao control inflation by reducing the cost of imported products such as oil and copper, which are priced in dollars. It also gives the central bank, which has sold yuan to prevent the currency from appreciating, more scope to increase interest rates to cool an economy that expanded 9.5 percent in the first quarter.

``Without moving the exchange rate, it looks like the Chinese authorities are struggling to slow the economy,'' said Jim O'Neill, head of global economic research at Goldman Sachs Group Inc. in London. ``The only way to deal with that and get better control over monetary policy is to change the currency regime.'' O'Neill, who spoke in an interview last month, has predicted for a year that a yuan shift may come at any time.


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