Tuesday, May 04, 2010

Euro Falls Below 9 Yuan

Back in November, Paul Krugman complained that the Chinese government had kept the yuan/[U.S.]dollar exchange rate stable despite a drop in the U.S. dollar's exchange rate:

"And in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation, keeping the yuan-dollar exchange rate fixed even as the dollar has fallen sharply against other major currencies."

But in recent months, the U.S. dollar has in fact risen against other major currencies, particularly the euro. As a result, the euro has dropped from a high of 10.3 yuan in November to less than 9 yuan today. The gains have been lower against other currencies, but the yuan is also up against for example the yen and the pound. Does this mean that China has carried out a benefit-thy-neighbor revaluation? Or does this indicate that the Chinese might not have been motivated as much by a desire for a low exchange rate but for a stable exchange rate against the dollar? It would be interesting to hear Krugman's take on it, though I personally view the latter as more plausible.

As a sidenote, I analyzed the various other fallacies in that column here.

Another interesting thing to note is that for the people who argued that Greece needs a weaker currency, they are in fact getting just that right now, so they should also be pleased by this development.