International | Apr 06 2006
The US continues to push hard for China to move more quickly in revaluing its currency, but the Chinese approach of bringing about a more gradual pace of change in the value of its currency is receiving support from an unexpected source.
The European Commission has produced a paper that supports a more gradual pace of revaluation, which will be discussed at an upcoming meeting of EU finance ministers in Vienna.
The paper argues a rapid rate of revaluation of the Renminbi could see an equally quick reversal in the rate of capital flows into the US, which would likely see the US dollar move lower against the Euro and other currencies.
Such a move would make EU exports to the US more expensive, which could see the emerging economic recovery in the region come under pressure.
The view of the EU is at odds with the US position, where pressure for a revaluation is on the verge of going so far as naming China a currency manipulator.
Despite supporting China’s view, there may yet be a reversal in capital flows in the US, with Chinese monetary officials suggesting there will potentially be a reduction in their exposure to US dollar securities, likely to be achieved by allowing current holdings to mature and reinvesting the proceeds elsewhere.
Assuming some of this money goes into Euros as a way for the Chinese to diversify their holdings of foreign reserves, the EU may find its currency strengthening against the US dollar in coming months, whether or not they support the Chinese view on the pace of exchange rate adjustments.
