Looking back at the massive moves in the global currency markets this week, we have to consider this Chinese decision as being one of the more relevant factors. The US Dollar Index traded up +3.4% on the week alone, closing at 75.85, catching plenty of global macro investors off guard. Asian currencies we’re under siege.
In plain English, this move by the Chinese is the 1st explicit one that moves them towards a free floating exchange rate. The announcement came on Wednesday, and that coincided with huge volatility in global currency trading immediately thereafter.
Since 2005, the Chinese used "reference currencies" as a basket. In addition to the US$, the major currencies in that basket were presumably the Euro, the Yen, and the South Korean won.
This important decision marks the third of consequence that the Chinese have made since 1997 on the FX front, where they went from a single regulated rate, to a managed floating rate relative to a "basket", to this most recent one.
It is global this time, indeed.
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