Currency News: China Unexpectedly Devalues Yuan
Currency News
The People’s Bank of China (PBOC), unexpectedly decided to devalue its currency, the Chinese yuan, by 1.9% against the US dollar. After the move on Tuesday, the yuan fell to 6.32 against the dollar, compared to 6.21 yuan per dollar on Monday. This fall was the largest single day fall in 20 years, as the currency approached its lowest level in three years against the dollar. The move was unexpected as China had been attempting to strengthen the currency in recent years to appease trading partners who had complained about the artificial weakening of the yuan in the past.
While the move was unexpected, it does make sense considering the nation’s struggling economy. This issue was exacerbated by an 8.3% drop in exports during the month of July from the same month one year earlier. China hopes that a cheaper yuan will make its exports more attractive to the Japan and European markets. Other countries in Asia had previously been going through quantitative easing, while the PBOC maintained its support of the currency’s strength.
The move to devalue the yuan had had effects on other areas of the economy as well. The early losers were Chinese airlines and European luxury carmakers. The Chinese airlines’ debt is mostly in dollars, so a more expensive dollar increases the cost of paying off that debt. The cheaper yuan also makes the price of European luxury vehicles more expensive for Chinese consumers. Chinese policy makers said the adjustment will be a one time thing and that its fixing will become more aligned with supply and demand.
