Wednesday, October 27, 2010

Who's Pegged To Whom?

I find it revealing that when China hiked interest rates last week, the USD promptly rallied. Of course the rally was short-lived, but it confirms a suspicion I have long held: it's not the renminbi that is pegged to the dollar, it's the dollar that's pegged to the renminbi.

(Aside: treating the US and China as a single economic entity -- albeit one with large internal imbalances and frictions -- is a very useful construct when thinking about global trade flows. Maybe some day I will write a longer post about the implications of such a world-view).

(Another aside: quite a few macro traders believe in the DGDF (dollar goes down forever) hypothesis, for very good monetarist / inflationary reasons. But in my opinion the dollar won't really begin to decline until it is delinked from the world's fundamentally strongest currency.)

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