How does the China rate hike affect the US Dollar ?

[Michael]

The US Dollar is getting a bid today pretty strong off the China rate hike. If the Yuan is pegged to the US Dollar, and China is in essence 'removing' Yuan out of the system, wouldn't this be bad for the US Dollar, as they have to sell off reserves to balance out the removal of the Yuan ?

[DoILiveInOz]

Yes, Selling dollar reserves tends to reduce the value of the dollar, but therre are also other factors that effect the vvalue of the dollar.

[eddie]

A rate hike will do two things. It will increase costs to borrow RMB domestically in China. Therefore, it will also make foreign direct investment more costly to the investor since each yuan they borrow from the bank will carry higher interest. This would trigger a slowdown in China's economy and decrease Chinese demand for worldwide goods and services. Everyone who sells to China loses business - leading to a worldwide economic slowdown.

From my reading in the last few weeks, it seems that Bernanke is going to use quantitative easing to force China's (and everyone else) currency higher so that they would need to diminish their own foreign currency reserves to defend the RMB, thus weakening the economic leverage they have on the U.S. Otherwise, China would have to allow the yuan to rise against the dollar, making U.S. exports cheaper to the rest of the world. This is also politically strategic since it would destablize China's export driven economic model by making it more expensive to manufacture in China. It seems that China has responded by stimulating a slowdown in their own economy by hiking their interest rates. As Bernanke probably hoped for, on October 19th there was a surge in dollar, due to the market's reaction to a possible slowdown in China, hinted by an interest rate hike. So far, it would seem that the world still treats the greenback as a safe haven for storing value. However, by today, October 20th, it seems that the U.S. dollar has continued its free fall against several world currencies. Several news agencies reported that investors had so much confidence in the Chinese economy that they shrugged off the rate hike and returned to business as usual. This is a frightening scenario because it suggests that investors worldwide no longer feel confident that the US dollar is no longer a safe haven. What's worse is that Bernanke's quantitative easing hasn't even occurred yet. The investors have preemptively admitted their lack of faith in the U.S. economy simply on the possibility of more dollar inflation. So, come November, if Ben goes through with QE2, it could actually be the end of the dollar as a world reserve currency - followed by IMF heirarchy reorganization, capital flight from the U.S., eventual economic collapse, social breakdown coast to coast, martial law, rationing, curfews, secession movements in California and Texas backed clandestinely by Chinese/Russian/Arab money, domestic terrorism from pissed off citizens, another 9/11 event, clashes between the U.S. military and state militias, rogue pacific fleet commanders... the end of the U.S. as it was known. In case of such a catastrophic (nuclear) event, I have no doubt that Asia, Africa, Europe, and South America would come to some agreement on a world currency to save their own asses - leaving the U.S. to flounder on its own. So, in summary, the rate hike is may have been the U.S. death knell.