The two largest economies on the planet right now belong to the United States and China, if you look at specific countries, and don’t count the entire European Union as its own solid entity. This puts the two currencies of each country, the dollar and the yuan, specifically at odds with each other. This continuously expanding story has gotten even more interesting, as of late, though. Here’s why…
Yuan’s history of growth
For nearly a decade, the yuan has been able to establish itself as a strong competitive currency by continuing to increase in value during this time. While there have been small instances where the currency has briefly weakened, the overall story of the yuan has been one of tremendous growth. However, they may have hit a roadblock, recently. One big goal for the People’s Bank of China over the past year has been to increase the usage of the yuan so that they can make a push to become the official reserve currency of the IMF.
Yuan is being devalued
For a while, it appeared that the yuan was perfectly on track to becoming one of the currencies that are a part of the IMF’s SDR (special drawing rights). However, there has been a good deal of doubt placed upon the strength of the yuan after the People’s Bank of China needed to cut interest rates on the yuan by an enormous 1.9%. Ultimately, it was a necessary move for China to make, in order to stabilize the strong manufacturing industry in China. Due to the strength of the yuan during the past year, the country’s exports fell 8.3%. This devaluation is needed to establish a beneficial trade rate that keeps the manufacturing companies in a China in business, although it is now casting doubt on whether or not China’s economy is as stable as it seems.
Good news for the dollar
This recent development is excellent news for the dollar, which has recently been strengthened by the Federal Reserve’s increase in the interest rate. Until the future of the yuan is clear, it will likely mean that the interest rate will continue to rise over this year, as planned, in light of renewed confidence in the dollar’s growth. This confidence isn’t just contained to the yuan, either, and exists due to the stability that the dollar is currently showing against other world currencies, except the relatively strong euro.