CNY/USD Hits 19-Year High

Precious metal prices crept higher yesterday, as expectations that Spain will request a bailout increased among traders. Gains in the EUR/USD continue to coincide with gains in metals and other so-called “risk” assets. The Dollar Index (USDX) has held surprisingly firm since the Federal Reserve’s adoption of unlimited quantitative easing a month ago, but the longer-term USDX chart suggests the dollar will head lower in the coming weeks and months, as we’ve had a rally into the 80s, and are now due a fall back into the mid-to-low 70s. 72.00 on the USDX remains the key all-time price low (first reached in March 2008, and again in April 2011). Third time will likely be third time lucky for the bears, given the Fed’s determination to trash the greenback.

Old World Charm
The weakness of the USDX is its heavy-weighting in favour of “old world” currencies from Europe and North America (plus Japan). Broader long-term measures make it clear that the dollar is losing value against a host of Asian currencies; today’s news that the Chinese yuan has hit a 19-year high against the dollar a reminder of this. The FT reports that CNY/USD hit $6.2676 earlier today, a big 0.15% increase on its Thursday close and near the top of the 1% range at which it is allowed to deviate from a fixing set by the People’s Bank of China.

Analysts are struggling to make sense of this, given that the Chinese economy appears to be slowing, making a strong yuan less desirable as far as the Chinese government is concerned. One explanation offered by the FT is that this is a sop to America -- a means of blunting more criticism from the presidential candidates about China’s “currency manipulation”. Romney has been a particularly strident critic of Chinese monetary policy. All very hypocritical in light of the Federal Reserve’s unofficial weak dollar policy since 2008, but that’s life.