Why did the US dollar begin to plummet in the 2nd and 3rd quarters of 2005 in comparison to the Chinese Yuan?
I was startled by a graph representing the value of the us dollar to the yuan... it was cliff-like!
Answer:
The US dollar is no longer based on the gold standard, but on the state of the economy. During the time in question, the US amassed a ton of debt, with China as our creditor.
I would not call it an unexpected plummet as the non-deliverable (offshore) forward and swap markets were predicting a 2 to 4% yuan value increase within a year or so of 2Q 2005.
But the event that got this trend going was on 21 July 2005 when the Chinese government revalued the yuan. It had been on a U.S. dollar peg since 1995 or 1994 at 8.28 yuan per U.S. dollar and now was moved 2% higher to 8.11. Additionally the government announced that the U.S. dollar peg policy was over and that the yuan would be pegged to a market basket of various widely used currencies (including the U.S. dollar) such as the Euro, Japanese Yen, etc. The People's Bank of China (central bank) does not allow the yuan to trade freely to this day. It allows the market to fluctuate on a daily basis by +/- 0.3% from the central bank's previous day "closing rate" against the market basket.
Currently the USD/CNY rate is at 7.745.
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Answer:
The US dollar is no longer based on the gold standard, but on the state of the economy. During the time in question, the US amassed a ton of debt, with China as our creditor.
I would not call it an unexpected plummet as the non-deliverable (offshore) forward and swap markets were predicting a 2 to 4% yuan value increase within a year or so of 2Q 2005.
But the event that got this trend going was on 21 July 2005 when the Chinese government revalued the yuan. It had been on a U.S. dollar peg since 1995 or 1994 at 8.28 yuan per U.S. dollar and now was moved 2% higher to 8.11. Additionally the government announced that the U.S. dollar peg policy was over and that the yuan would be pegged to a market basket of various widely used currencies (including the U.S. dollar) such as the Euro, Japanese Yen, etc. The People's Bank of China (central bank) does not allow the yuan to trade freely to this day. It allows the market to fluctuate on a daily basis by +/- 0.3% from the central bank's previous day "closing rate" against the market basket.
Currently the USD/CNY rate is at 7.745.
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