Evidently frustrated by the Euro’s appreciation against the USD, a
group of EU ministers has turned its attention to China, calling on it
to allow the Yuan to appreciate against the Euro. While the Yuan has
appreciated nearly 10% against the USD over the last two years, it has
actually decreased in value against the Euro. As a result, the EU trade
deficit has set a fresh record nearly every month. Unfortunately, the
Yuan basically remains pegged to the USD, and since the USD is
depreciating faster against the Euro than against
the Chinese Yuan, the
law of triangular arbitrage dictates the
Euro must be appreciating against the Yuan. It appears China’s hands are tied. Bloomberg News reports:
“I can assure you China will continue to adopt a reform
oriented policy on its exchange-rate mechanism,” said a Chinese Foreign
Ministry spokesman. “But these
adjustments have to be done gradually and in line with the market.”
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