China Exerts Unprecedented Control Over US Dollar

National governments regularly intervene in foreign exchange markets since exchange rates have profound impacts on countries’ economies. For example, if the US dollar rises in value against the Chinese yuan, Chinese goods get cheaper in the US and US goods get more expensive in China. Other things equal, this hurts US exports to China.

Given the imbalances in the global markets that have been allowed to worsen for years, the opportunities for one nation to engage another in a currency war have grown.  China made a move last August that illustrates this well.

China fired a shot heard ’round the world Aug. 11, stoking fears of what could become the ugliest of all currency wars. In a surprise move, the country massively devalued the yuan 2% – its biggest one-day devaluation in 20 years.

Chinese officials were quick to play down the devaluation. Ma Jun, the chief economist at the People’s Bank of China, said the Chinese government had “no intention or need to participate in a currency war.”

But, as is often the case, actions speak louder than words.

“China is no longer an average player in the global economy. They’re the second-largest economy in the world. And when you have the devaluation of 2% right off the bat automatically – you’re going to have a higher cost burden on the exports from the United States to Asia, and to one of our largest export markets, to say nothing of the impact it’s going to have on the region,” Jon Huntsman, former U.S. ambassador to China, told CNN on Aug. 16. “So when you look at the immediate import that it had on currencies – you get a sense as to why people are very, very frustrated with China.”

Frustrated, indeed.  And likely to get much more so as this battle intensifies and China gains more control over the value of the US dollar.

Peter Schiff, CEO of Euro Pacific Capital and best-selling author of “Crash Proof,” issued a warning about currency wars and an impending U.S. dollar collapse. He spoke to Newsmax TV on Aug. 11:

“We’re on the verge of a much worse financial crisis than the one we went through in 2008, and it’s going to take the form of a currency crisis. You’re talking about currency wars. America is going to win the currency war, which is a race to the bottom, and you don’t want to win a currency war because a currency war is different from most wars in that the object is to kill yourself and unfortunately, we’re going to succeed.”

Predictions of an imminent dollar collapse are nothing new. That said, the possibility cannot be dismissed.

China, for all its problems, is a major player in international trade and investment. And it has every intention of increasing its influence. At the same time, financial mismanagement within nations such as the US put us at a disadvantage.

There is nothing encouraging about a nation the size of China having so much power over the value of our currency. Consider how that can be used to influence American policy not only regarding our economy, but also militarily as well.

Source:  Money Morning