Sunday, March 7, 2010

Chinese Remove The Peg

Massive news out of China this weekend from the governor of the People's Bank of China, who said the days of the "special yuan" were numbered. By this he meant the peg of the Chinese yuan to the value of the dollar in the currency markets. He described the dollar peg as a temporary response to the global financial crisis.

The last bastion of hope for the US currency is its peg to the strength of the Chinese yuan. Now that they have stopped purchasing our debt, the removal of the peg will be the final step before the dollar sinks into oblivion.

The announcement could have been sparked by the CBO's upated budget projections that I discussed earlier this week. In the new projections Obama has planned massive tax cuts with no mention of spending reductions. Translation: "China, we plan to make the value of your dollar denominated reserves as close to zero as possible."

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