The recession has hit our economy really hard, and there should be no bones made about that. As stimulus packages were announced and subsequently deployed, unemployment ending up touching all time highs and the deficit showed no signs of contracting in the slightest. In the midst of all of this, the government has sought to boost the value of export earnings as earned by US corporations at this moment in time, and to do so the Fed is being forced into devaluing the US Dollar. By doing so, overseas earnings become more lucrative but this sort of protectionism is perhaps not the best policy to follow since it is at the end of the day a trade barrier plain and simple and as many trade barriers before it, it will fall short of expectations.
When attempting to ascertain the value of currencies, risk and reward obviously comes into play, as does the weight or pall of expectations surrounding it. Reward is best described by the interest rate of a particular currency while risk (like beauty) lies in the eye of the beholder. It is hard to quantify risks that are being taken but it is a fair statement to say that a simple understanding of the balance of payments helps investors decide just how much of a risk a given currency is. Another measure is government debt expressed as a part of the Gross Domestic Product (GDP) of a nation. If both of these measures are fairly large, rest assured investors will find a currency to be more risky.
China have been the great currency manipulator of our times and for more than a decade now they have exported to markets such as the USA that have gladly lapped up the low priced products that Chinese manufacturers have offered up. As a result, the Chinese Yuan should have risen (not dropped) against the US Dollar in order to balance out the trade surplus that is existent. Instead the Chinese have pegged the Yuan to the US Dollar, meaning that a natural balancing has not taken place. What has thus happened is a game of political maneuvering and an economic imbalance that has made the dollar look stronger than it actually is given the state of the American economy.
Left to their own devices, the Chinese government might well have eliminated this peg of their own accord, but the Fed is not willing to wait around in the hope of this happening. They are not optimistic of the market naturally correcting and have turned to the printing presses in an effort to devalue the currency by the dint of their own strength. And so the tsunami continues to build up inside and outside the US economy, making an abysmal situation even more abject if such a thing is truly possible. Brace yourselves for a wild ride as the US now risks a potentially full-scale trade war between two giants, one the world’s largest consumer of products and the other the largest manufacturer of it all.