From the NY Times:
A Currency Afloat (for All of 20 Minutes)I am betting on a glitch. Fascinating that such a small change could have such a big effect in terms of other currencies (and gold) changing their prices on the news of such a small shift. Personally, I'm waiting for India to wake up and start exporting more stuff. I spend a lot of money at this place Grizzly Tools. They import tools from Taiwan, India and China. The Taiwan tools are awesome. I have one of their 17" bandsaws and it is solid and gorgeous. The factory over there is ISO-9000. All of Grizzly's precision equipment comes from there. Their Chinese stuff is much lower quality. Not as bad as Harbor Freight but pretty bad -- I bought one of their metal cutting saws and it needed a couple hours of tweaking to cut squarely and the casters were not able to fit their axle without some work on my part. India sells a lot of small machinists tools -- squares, levels, etc... These are works of art and I would love to see what they do with larger machinery. There is a company down in Oregon that imports Indian copies of the old English Lister Diesel engines and they are supposed to be beautiful and run forever. It will be interesting to see what happens if the Chinese exports do slow a bit -- right now, their over-the-top purchases of oil and steel are hurting our economy.
The Bush administration has been pressing the Chinese government for years to allow its currency, which is pegged to the dollar, to trade more freely. It got its wish on Friday - but only for 20 minutes.
A freely trading Chinese yuan would probably rise in value against the dollar, making Chinese exports to the United States more costly. That, in turn, would give relief to American manufacturers battered by low-priced Chinese goods as the American trade deficit has been growing faster with China than with any other country. It would also be a political victory for the Bush administration.
Until this afternoon, China had ignored the demands. But as traders drifted back to their desks from lunch in Asian financial capitals on Friday, the yuan suddenly broke out of its prescribed trading range. No one knows for sure if the move was deliberate or a result of a technical glitch.
But regardless of whether it was a Chinese test of their ability to manage a rising yuan or simply a case of the Chinese central bank briefly failing to buy enough dollars to keep supporting the American currency, traders noticed it and the prices for many other currencies began to shift in response.
The yuan climbed until it took 8.270 of them to buy a dollar instead of the usual 8.276. That difference, of only six thousandths of a yuan, might not seem like much of a change.
But it came on the eve of a weeklong holiday in China and at a time of intense speculation that a Chinese revaluation of the currency, which has been fixed by Beijing against the dollar for years, might be imminent. The brief appreciation, a hint of further rises if the yuan were to float, was enough to roil currency markets around the world.
The dollar fell and the euro, yen and gold rose as investors placed bets that if China let the yuan rise against the dollar, other countries would also permit their currencies to appreciate against the dollar because their exporters would no longer be so fearful of being undercut by Chinese rivals.
