Forex US Dollar rates continue weaker vs. Yuan

The US dollar was lower against other major currencies early in Asian trading hours Monday as the sell-off that began Friday continued.

This week, currency markets are likely to watch for further trouble in the US housing market and for US corporate earnings reports that might show a more widespread slowdown in the US economy.

At 9.50 am here (2350 GMT Sunday), the dollar was at 121.33 yen, down from 121.59 yen in late trading in New York Friday. The euro was at 1.3839 dollars, up from 1.3833 in New York.

The US dollar was sold heavily Friday on continuing concern about the sub-prime mortgage market in the US, which pushed the US 10-year bond yield down to 4.95 percent.

This lifted the euro to a new record high of 1.3843 dollars, sterling to a new 26-year high of 2.0587 dollars and the Australian dollar to a new 18-year high of 0.8834 dollar.

St Louis Federal Reserve president William Poole commented Friday that the fall in the value of the US dollar would increase inflationary pressure, but that it was not a decisive influence. Poole also said that losses in the non-prime mortgage market were large enough to affect home building and consumer spending.

The Chinese central bank's decision Friday to increase its lending rate by 27 basis points to 6.84 percent and its deposit rate by 27 basis points to 3.33 percent is seen as having little effect on currency markets. The increase is meant to counter inflation, which was running at an annual rate of 4.4 percent in June.

The Chinese central bank also cut the rate of withholding tax on interest from deposits to 5 percent from 20 percent in order to increase returns from bank deposits and take the steam out of the Chinese stock markets.

In a move that could trim the trade gap with the United States, China revalued its currency higher against the dollar Thursday and said it would no longer have the yuan tied to a fixed rate against the U.S. currency.

The move, while small at this point, could be the first step to reduce competition for some U.S. companies from lower-priced Chinese imports.

A stronger yuan could also increase the sales U.S. exporters get from business with the world's largest country, one of the fastest growing consumer markets. U.S. exporters could keep their prices the same in U.S. dollars, thus lowering the price in yuan and spurring increased sales. Or they could keep prices in yuan level, and bring in a greater amount of dollars.

Reuters reported that U.S. Treasury Secretary John Snow praised the move in a meeting with reporters Thursday morning. Both the administration and members of Congress have been calling on China to end its fixed dollar-yuan peg. There is legislation before Congress that threatens trade sanctions on China if the yuan did not start trading freely in currency markets.

"This is a good first step, albeit a baby step," said .S. Sen. Charles Schumer, D-N.Y., one of the authors of the legislation, at the start of a hearing of the Senate Banking Committee. "It is smaller than we had hoped, but to paraphrase the Chinese philosophers, a trip of a thousand miles can well begin with the first baby step. If there are not larger steps in the future, we will not have accomplished very much. But after years of inaction, this step is welcome."

Federal Reserve Chairman Alan Greenspan, who was giving his semi-annual testimony to the banking committee, said he basically agreed with Schumer.

"It's the type of step you would want to take when you've had a decade-long fixed structure," said Greenspan. "I think they've been cautious and admirably so."

On the downside for American citizens, it could lead to increased prices for Chinese-made goods such as apparel and electronics. But economists doubt that with a change in valuation as small as Thursday's move that prices will increase.

"The change is pretty slight but very significant because of the fact that they did allow it to revalue. Now speculation is that this will pave the way for further valuations down the road," said Ezechiel Copic, currency analyst for MG Financial Group.

The fixed rate between the yuan and the dollar has been blamed for the soaring trade gap between China and the United States, as it kept Chinese-made goods cheap here.

The trade gap between the United States and China was $72.5 billion the first five months of this year, by far the largest gap of with any trading partner. It was more than the U.S. gap with Japan and OPEC combined during the same period.

Jay Bryson, global economist for Wachovia Securities, said that there is still more unknown than known about the way the new valuation system will work. He doesn't expect it to cause an immediate impact on the economics of that trade, but he said it opens the door to further strengthening of the yuan.

"Will the yuan be 30 percent stronger vs. the dollar a year from now? I doubt that. Could it be 10 percent stronger? Yeah, that's reasonable," he said. "It will help somewhat people who compete against Chinese exporters. It doesn't mean textile jobs will come back to North Carolina, those jobs are gone. But it might help a manufacturer who is still here."

U.S. stock futures soared immediately after the statement from People's Bank of China just after 7 a.m. ET Thursday. But an hour later much of those gains had evaporated after traders had a chance to examine and weigh the statement.

The statement said China will immediately value the currency at 8.11 yuan, down 2 percent from the 8.28 rate previously. It also said it will now peg the yuan against a "market basket" of numerous currencies, although it will keep the yuan in a tight band rather than letting it trade freely. But the central bank did promise that the exchange rate band would be adjusted when necessary according to market developments as well as economic and financial situations.

Reuters quoted another statement from the bank as saying any sharp swing in the yuan's exchange rate would hit China's financial system, and therefore would not be in Beijing's interest.

The U.S. Congress had been threatening to impose stiff trade sanctions on Chinese imports if it did not allow more market-based valuation of the yuan. The move by the Chinese reduces the threat of that kind of trade war, which is one of the factors that likely lifted futures early, said Bryson.

"Obviously they're getting a lot of flak from Congress and the Europeans as well. It was going to happen at some point anyway. It probably happened sooner than it would have if Congress and the administration hadn't said anything," said Bryson.

But University of Maryland Professor Peter Morici, a vocal critic of the Chinese government's policy on currency, said this move doesn't suggest any significant change in the economics of trade is on the horizon.

"This is a fig leaf. It's an attempt by the Chinese to do the least amount possible," said Morici, who estimated that the yuan is about 40 percent undervalued because of the trading restrictions.

"Even a pace of 10 percent change a year will get us there too slowly," he said. "(With this change) China will continue to have very large trade surpluses and cause damage to industries that compete with Chinese companies."

A survey conducted in June by Baruch College's Zicklin School of Business of nearly 200 chief financial officers who belong to Financial Executives International found only a fraction thought a yuan revaluation would have a large impact on their business, and of those who saw a change, they were equally split whether it would represent good or bad news.

The survey found 5 percent who expected a significantly positive impact and 6 percent said the impact would be significantly negative, while 39 percent saw no impact on their companies. Those surveyed include executives at both large and small and both public and privately held companies.

Sydney 9.50 am (2350 GMT Sunday)

US dollar

121.33 yen

1.2007 sfr

Euro

1.3839 usd

167.89 yen

1.6611 sfr

0.6733 stg

Sterling

2.0559 usd

249.37 yen

2.4680 sfr

Australian dollar

0.8802 usd

0.4283 stg

106.81 yen

New Zealand dollar

0.7976 usd

Yuan Wiki for Background Data

Yuan in Chinese literally means a "round object" or "round coin". During the Qing Dynasty, the yuan was a round, silver coin.

As with the Chinese numerals, the character for yuan has two forms — a less formal, 元, and a more formal, 圓 or 圆, the latter being used to prevent alterations and accounting mistakes. The Japanese yen was originally also written 圓, but is now represented by the simplified character 円 due to the promulgation of the toyo kanji in 1946. The Korean won used to be written 圓 some time after World War II and as 圜 from 1902 to 1910, but is now written as 원 in Hangul exclusively, in both North and South Korea. The Hong Kong dollar and Macanese pataca are also written as yuan in Chinese.

Shop prices in mainland China and Taiwan are usually marked with 元 after the digits. In mainland China, Y or ¥ before the digits is also common as well as the use of RMB to denote the currency.

The Chinese pronunciation of yuan is one syllable and is pronounced closer to the English pronunciation of "yen". This is not to be confused with the Japanese pronunciation which is "en", with no y sound. Sometime in English yuan is incorrectly pronounced as /ju:'æn/ (two syllables). In many parts of China, it is colloquially known as the kuai (Traditional Chinese: 塊; Simplified Chinese: 块; Pinyin: kuai; literally "piece").

[edit] Connection with dollar

Originally, a silver yuan had the same specifications as a silver dollar. During the Republican era (1911 - 1949), the English translation "yuan" was often printed on the reverse of the first yuan banknotes but sometimes "dollar" was used instead.^[1]

In the Republic of China, the common English name is the "New Taiwan dollar" but banknotes issued between 1949 to 1956 used "yuan" as the English translation ^[2] whilst more modern notes lack any English text.

[edit] First yuan, 1889-1948

Two 5 yuan notes
Bank of China, 1926 (bottom row)
Central Bank of China, 1936 (top row)

The yuan was introduced at par with the Mexican peso, a silver coin deriving from the Spanish dollar which circulated widely in South East Asia since the 17th century. It was subdivided into 1000 wén (文, cash), 100 fen (分, cents) or 10 jiao (角, not given an English name, cf. dime). It replaced the wén and various silver ingots called sycee. The sycee were denominated in tael. The yuan was valued at 0.72 tael.

The earliest issues were silver coins produced at the Kwangtung mint. Other regional mints were opened in the 1890s. The central government began issuing its own coins in the yuan currency system in 1903. Banknotes were issued in yuan denominations from the 1890s by several local and private banks, along with banks established by the Imperial government.

After the revolution, a great many local, national and foreign banks issued currency but the provincial coinages mostly ended in the 1920s. In the 1930s, several other currencies came into being in China due to the activities of the Communists and invading Japanese. The pre-existing yuan came to be associated only with the Nationalist, Kuomintang government. In 1935, the Kuomintang Government enacted currency reforms to limit currency issuance to four major government controlled banks: the Bank of China, Central Bank of China, Bank of Communications and later the Farmers Bank of China. The circulation of silver yuan coins was prohibited and private ownership of silver was banned. The banknotes issued in its place were known as 法幣 (Pinyin: fǎbì) or "Legal Tender".

Between 1930 and 1948, banknotes were also issued by the Central Bank of China denominated in customs gold units. These circulated as normal currency in the 1940s alongside the yuan.

In the aftermath of the Second World War and during the civil war which followed, Nationalist China suffered from hyperinflation, leading to the introduction of a new currency in 1948, the gold yuan.

[edit] Coins

The earliest issues were silver coins produced at the Guangdong (Kwangtung) mint in denominations of 5 fen, 1, 2 and 5 jiao and 1 yuan. Other regional mints were opened in the 1890s producing similar silver coins along with copper coins in denominations of 1, 2, 5, 10 and 20 wén.

Provincial Coinage for the First Yuan
Province	Dates of Coin Production
	Start	Finish
Anhui (Anhwei)	1897	1909
Zhejiang (Chekiang)	1897	1924
Hebei (Chihli)	1896	1908
Liaoning (Fengtien)	1897	1929
Fujian (Fukien)	1896	1932
Henan (Honan)	1905	1931
Hunan	1897	1926
Hubei (Hupeh)	1895	1920
Gansu (Kansu)	1914	1928
Jiangnan (Kiangnan)	1898	1911
Jiangxi (Kiangsi)	1901	1912
Jiangsu (Kiangsu)	1898	1906
Jilin (Kirin)	1899	1909
Guangxi (Kwangsi)	1919	1949
Guangdong (Kwangtung)	1889	1929
Guizhou (Kweichow)	1928	1949
Shanxi (Shansi)	1913	1913
Shandong (Shantung)	1904	1906
Shaanxi (Shensi)	1928	1928
Xinjiang (Sinkiang)	1901	1949
Sichuan (Szechuan)	1898	1930
Taiwan	1893	1894
Yunnan	1906	1949

The central government began issuing its own coins in the yuan currency system in 1903. These were brass 1 wén, copper 2, 5, 10 and 20 wén, and silver 1, 2 and 5 jiao and 1 yuan. After the revolution, although the designs changed, the sizes and metals used in the coinage remained mostly unchanged until the 1930s. From 1936, the central government issued nickel (later cupro-nickel) 5, 10 and 20 fen and ½ yuan coins. Aluminium 1 and 5 fen pieces were issued in 1940.

[edit] Banknotes

Banknotes were issued in yuan denominations from the 1890s by several local and private banks, along with the "Imperial Bank of China" and the "Hu Pu Bank" (later the "Ta-Ch'ing Government Bank"), established by the Imperial government.

The number of banks issuing paper money increased after the revolution. Significant national issuers included the "Commercial Bank of China" (the former Imperial Bank), the "Bank of China" (the former Ta-Ch'ing Government Bank), the "Bank of Communications", the "Ningpo Commercial Bank", the "Central Bank of China" and the "Farmers Bank of China". Of these, only the Central Bank of China issued notes beyond 1943. An exceptionally large number of banknotes were issued during the Republican era (1911 - 1949). However, the majority of regional mints closed during the 1920s and 1930s, although some did continue until 1949.

During the Imperial period, banknotes were issued in denominations of 1, 2 and 5 jiao, 1, 2, 5, 10, 50 and 100 yuan, although notes below 1 yuan were uncommon. However, after the revolution, "small money" notes proliferated with 1, 2 and 5 fen denominations appearing. Many notes were issued denominated in English in "copper coins", meaning wén.

In the 1940s, larger denominations of notes appeared due to the high inflation. 500 yuan notes were introduced in 1941, followed by 1000 and 2000 yuan in 1942, 2500 and 5000 yuan in 1945 and 10,000 yuan in 1947.

[edit] Second (Gold) yuan, 1948-1949

Banknotes of the first yuan suffered from hyperinflation following the Second World War and were replaced in August 1948 by notes denominated in gold yuan, worth 3 million old yuan. There was no link between the gold yuan and gold metal or coins and this yuan also suffered from hyperinflation.

[edit] Banknotes

In 1948, the Central Bank of China issued notes (some dated 1945 and 1946) in denominations of 1, 2 and 5 jiao, 1, 5, 10, 20, 50 and 100 yuan. In 1949, higher denominations of 500, 1000, 5000, 10,000, 50,000, 100,000, 500,000, 1,000,000 and 5,000,000 yuan were issued.

[edit] Third (Silver) yuan, 1949

In July 1949, the Nationalist Government introduced the silver yuan, which was initially worth 500 million gold yuan (Silver yuan on Chinese wikipedia). It circulated for a few months on the mainland before the end of the civil war. This silver yuan remained the de jure official currency of the Republic government on Taiwan until 2000.

[edit] Banknotes

The Central Bank of China issued notes in denominations of 1 and 5 fen, 1, 2 and 5 jiao, 1, 5 and 10 yuan.

[edit] Manchurian (Fengtien) yuan, 1917-1932

In 1917, the warlord in control of Manchuria, Zhang Zuolin, introduced a new currency, known as the Fengtien yuan or dollar, for use in the Three Eastern Provinces. It was valued at 1.2 yuan in the earlier (and still circulating) "small money" banknotes and was initially set equal to the Japanese yen. It maintained its value (at times being worth a little more than the yen) until 1925, when Zhang Zuolin's military involvement in the rest of China lead to an increase in banknote production and a fall in the currencies value. The currency lost most of its value in 1928 as a consequence of the disturbance following Zhang Zuolin's assassination.

[edit] Banknotes

The Fengtien yuan was only issued in banknote form, with 1, 5 and 10 yuan notes issued in 1917, followed by 50 and 100 yuan notes in 1924. The last notes were issued in 1928.

[edit] Japanese Occupation yuan, 1937-1945

The Japanese occupiers issued coins and banknotes denominated in li (釐, 1/1000 of a yuan), fen, jiao and yuan. Issuers included a variety of banks, including the Central Reserve Bank of China (for the puppet government in Nanking) and the Federal Reserve Bank of China (for the puppet government in Beijing). The Japanese decreed the exchange rates between the various banks' issues and those of the Nationalists but the banknotes circulated with varying degrees of acceptance among the Chinese population. Between 1932 and 1945, the puppet state of Manchukuo issued its own yuan.

The Japanese established two collaborationist regimes during their occupation in China. In the north, the "Provisional Government of the Republic of China" (中華民國臨時政府) based in Beijing established the Federal Reserve Bank of China (中國聯合準備銀行, pinyin: Zhōngguó liánhé zhǔnbèi yínháng). The FRB issued notes in 1938 at par with Kuomintang yuan. Although initially equivalent, the Japanese banned the use of Nationalist currency in 1939 and set arbitrary exchange rates in favour of the FRB yuan. The FRB yuan was replaced by the Nationalist yuan in 1945 at 1 FRB yuan = 0.2 Nationalist yuan.

The Wang Jingwei government in Nanjing established the collaborationist Reformed Government of the Republic of China (南京維新政府) in 1938. This was later reorganised into the Wang Jingwei Government (南京國民政府) in 1940. They established the Central Reserve Bank of China (中央儲備銀行, pinyin: Zhōngyāng chǔbèi yínháng) which began issuing CRB yuan in 1941. Although initially set at par with the Nationalist yuan, it was also arbitrarily changed to equal 0.18 Japanese Military yen. In 1945, it was also replaced by the Nationalist yuan at 1 CRB yuan = 0.005 Nationalist yuan.

[edit] Coins

In 1937, the Chi Tung Bank issued copper 5 li and 1 fen, and cupro-nickel 5 fen and 1 and 2 jiao in East Hebei. The Mengchiang Bank issued cupro-nickel 5 jiao in northern China in 1938. The Hua Hsing Commercial Bank issued coins (dated 1940) in Shanghai in 1941. These were bronze 1 fen and cupro-nickel 10 fen. The Federal Reserve Bank issued aluminium 1 and 5 fen and 1 jiao between 1941 and 1943 from Beijing.

[edit] Banknotes

Five banks, the Central Reserve Bank of China, Federal Reserve Bank of China, Hua Hsing Commercial Bank, Mengchiang Bank and Chi Tung Bank, issued notes for use in the Japanese occupied areas. Denominations included ½, 1 and 5 fen, 1, 2 and 5 jiao, 1, 5, 10, 100, 200, 500, 1000, 5000, 10,000 and 100,000 yuan, with the denominations above 100 yuan only appearing in 1944 and 1945.

[edit] Northeastern yuan, 1945-1948

After the defeat of Japan in 1945, the Central Bank of China issued a separate currency in the northeast to replace those issued by the puppet banks. Termed "東北九省流通券" (pinyin:Dōngběi jiǔ shěng liútōngquàn), it was worth 20 of the yuan which circulated in the rest of the country. It was replaced in 1948 by the gold yuan at a rate of 150,000 northeastern yuan = 1 gold yuan.

[edit] Banknotes

In 1945, notes were introduced in denominations of 1, 5, 10, 50 and 100 yuan. 500 yuan notes were added in 1946, followed by 1000 and 2000 yuan in 1947 and 5000 and 10,000 yuan in 1948.

[edit] First Communist yuan, 1930-1949

The various Soviets under the control of China's communists issued coins between 1931 and 1935, and banknotes between 1930 and 1949. Some of the banknotes were denominated in ch'uan, strings of wén coins. The People's Bank was founded in 1948 and began issuing currency that year, but some of the regional banks continued to issue their own notes in to 1949.

[edit] Coins

Various, mostly crude coins were produced by the Soviets. Some only issued silver 1 yuan coins (Hunan, Hupeh-Honan-Anhwei, Min-Che-Kan, North Shensi and P'ing Chiang) whilst the Hsiang-O-Hsi Soviet only issued copper 1 fen coins and the Wan-Hsi-Pei Soviet issued only copper 50 wén coins. The Chinese Soviet Republic issued copper 1 and 5 fen and silver 2 jiao and 1 yuan coins. The Szechuan-Shensi Soviet issued copper 200 and 500 wén and silver 1 yuan coins.

[edit] Banknotes

Notes were produced by many different banks. There were two phases of note production. The first, up until 1936, involved banks in a total of seven areas, most of which were organized as Soviets. These were:

Area	Dates	Denominations
Chinese Soviet Republic	1933-1936	1, 5 fen, 1, 2, 5 jiao, 1, 2, 3 yuan
Hunan-Hupei-Kiangsi	1931-1933	1, 2, 3, 5 jiao, 1 yuan
Northwest Anhwei	1932	2, 5 jiao, 1, 5 yuan
Fukien-Chekiang-Kiangsi	1932-1934	10 wén, 1, 2, 5 jiao, 1, 10 yuan
Hupei	1930-1932	1, 2, 10 ch'uan, 1, 2, 5 jiao, 1 yuan
P'ing Chiang	1931	1, 2 jiao
Szechuan-Shensi	1932-1933	1, 2, 3, 5 and 10 ch'uan

Production of banknotes by communist forces ceased in 1936 but resumed in 1938 and continued through to the centralization of money production in 1948. A great many regional banks and other entities issued notes. Before 1942, denominations up to 100 yuan were issued. That year, the first notes up to 1000 yuan appeared. Notes up to 5000 yuan appeared in 1943, with 10,000 yuan notes appearing in 1947, 50,000 yuan in 1948 and 100,000 yuan in 1949.

[edit] Second Communist yuan, 1948-1955

Main article: Renminbi

As the communist forces took control of most of China, they introduced a new currency, in banknote form only, denominated in yuan. This became the sole currency of mainland China at the end of the civil war.

[edit] Renminbi yuan, 1955-

Main article: Renminbi

A new yuan was introduced in 1955 at a rate of 10,000 old yuan = 1 new yuan. It is known as the renminbi yuan.

[edit] First Taiwanese yuan

Main article: Old Taiwan dollar

In 1946, a new currency was introduced for circulation in Taiwan, replacing the Japanese issued Taiwan yen. It was not directly related to the mainland yuan.

[edit] Second Taiwanese yuan

Main article: New Taiwan dollar

In 1949, a second yuan was introduced in Taiwan, replacing the first at a rate of 40,000 to 1. This is the currency of Taiwan today.

[edit] See also

Look up Yuan in
Wiktionary, the free dictionary.

• Chinese customs gold unit
• Etymology of the Korean currencies

[edit] References

1. ^ Ronald Wise. Banknote images of China, 1914 - 1949. Retrieved on 2006-11-23.
2. ^ sinobanknote.com. Table of New Taiwan dollar. Retrieved on 2006-11-23.

• Krause, Chester L. and Clifford Mishler (1991). Standard Catalog of World Coins: 1801-1991, 18th ed., Krause Publications. ISBN 0-87341-150-1.
• Pick, Albert (1990). Standard Catalog of World Paper Money: Specialized Issues, Colin R. Bruce II and Neil Shafer (editors), 6th ed., Krause Publications. ISBN 0-87341-149-8.
• Pick, Albert (1994). Standard Catalog of World Paper Money: General Issues, Colin R. Bruce II and Neil Shafer (editors), 7th ed., Krause Publications. ISBN 0-87341-207-9.
  

The US Federal Reserve, the Yuan, and Gold

Dollars are losing value. But that doesn’t seem to stop people from wanting more of them. In exchange for gold, you can tender 673 US dollars and get a single ounce. This is 7.80 dollars more than the rate on Tuesday. But it’s still lower than the rate at the end of January one score and seven years ago, that is to say, the day Ronald Reagan was first sworn in as President of the United States of America. But that was before the United States had a US$9 trillion public debt…and a financing gap over US$60 trillion. People still had affordable mortgages…and only half as much debt, generally speaking..

The United States was at peace…and still a net-creditor to the rest of the world. Its trade with the rest of the world was still more or less in balance. Derivatives had barely been invented. And the money supply - that is to say the number of dollars in circulation - was hardly a quarter of what it is today (we are just making an educated guess).

You’d think the price of gold ought to be a bit higher. Go figure.

And pity the poor investors in Bear’s hedge fund - all their dollars have disappeared. Yes, dear reader, The Greatest Economic Boom Ever is fuelled by dollar creation…and yuan creation…and yen creation…and euro creation. My god, this boom has seen a genesis of money everywhere. But just as the great boom giveth, it also taketh away. We are preparing an essay for tomorrow on this subject, so we don’t want to give away the whole story, but readers need to be prepared. Just as we watched the geniuses at Bear and the other financial firms create wealth, we can also watch them destroy it. In a flash, billions…no trillions…of presumed, ersatz wealth can vanish.

Money that is created “out of thin air” - courtesy of central banks and financial firms - tends to go back from whence it came. For every genesis of wealth creation…there is an exodus of wealth destruction. Watch out for it…

Hardly a day goes by that someone, somewhere isn't griping about currencies.

In Ontario, embattled Ontario manufacturers rail about the suddenly airborne loonie. Members of the U.S. Congress want to bash China for fiddling with the yuan. And ordinary Argentines would rather hold just about any currency than their own.

So maybe it's time to rethink the whole idea of national currencies. That, at least, is the provocative thesis of Benn Steil, director of international economics at the Council on Foreign Relations in New York.

In an article in Foreign Affairs magazine, Mr. Steil suggests that scores of countries – from the Americas and Asia to Europe and the Middle East – should simply give up on their own currencies and embrace one of the world's global currencies, such as the euro or the U.S. dollar.

With the gold standard gone, marginal currencies simply can't survive against the sheer weight of globalization. Inflation and high interest rates are a constant threat.

“National currencies and global markets simply do not mix,” Mr. Steil argued. “Together they make a deadly brew of currency crises and geopolitical tension and create ready pretexts for damaging protectionism.”

Get rid of monetary nationalism, along with unloved currencies, and you'll rid the system of a major source of instability, he concluded.

Mr. Steil points to Europe in the developed world and Ecuador (which uses the U.S. dollar) in the developing world as shining examples of why fewer currencies are a good thing.

“Europeans used to say that being a country required having a national airline, a stock exchange, and a currency,” he wrote. “Today, no European country is any worse off without them. Even grumpy Italy has benefited enormously from the lower interest rates and permanent end to lira speculation.”

China, he suggested, would do well to give up the yuan in favour of a “pan-Asian” currency that would rival the euro and the dollar, while allowing the country to liberalize its financial and capital markets.

Just about every other country would be better off with the dollar or the euro as they gradually integrate into global financial markets.

Even better, he suggested, would be a new gold-based international monetary system, backed by private gold banks, rather than governments.

Where does that leave a country such as Canada? Its economy is puny compared with the United States or Europe, and the bulk of its trade is with its southern neighbour.

That can be a problem when the currency swings. The loonie's recent surge (past 95 cents U.S.) is nice if you're vacationing in Maine this summer. But it's pretty devastating if you're making auto parts and other manufactured goods for the U.S. market.

The rest of the Canadian economy – oil, most other commodities and the service sector – are humming along fine. The net result is an economy that appears much stronger than the United States' (3.5-per-cent annualized first-quarter growth vs. 0.7 per cent in the U.S.). But pockets of the manufacturing heartland in Ontario and Quebec are hurting badly.

Wouldn't it be nice to have it both ways – stability for exporters and an end to currency swings.

Mr. Steil seems to think so. In an interview, he said Canada isn't like Brazil or Turkey, where the threat of a currency crisis is ever present.

“Canada can certainly sustain a national currency, because Canadians, as well as foreigners, treat the currency as a reliable store of wealth,” he said. “Canada is at no significant risk of a currency crisis.”

But that doesn't mean Canada couldn't do better. Mr. Steil argued that the “economic arguments” for Canada-U.S. monetary integration are compelling.

The main impediments, he suggested, are political, not economic.

And that's part of the problem. The United States, and more specifically, the U.S. Federal Reserve Board, has become a reluctant central bank for the world. Its interest rate decisions affect borrowing costs and investment yields everywhere.

As long as the United States acts responsibly, keeping inflation low and steady, the rest of the world will be okay.

But if you suspect Fed chairman Ben Bernanke is drinking and driving at the wheel of the global economy, you might want to stock up on some gol

Chinese Yuan vs. US Dollar intial posting

THE WEST MAY benefit most from the Chinese nudging their currency, the yuan, into a managed float regime. Imports by Western nations could get dearer while their exports rise, becoming comparatively cheaper. Over the last two years, Western business (read United States) interests have been badgering China to alter its fixed exchange rate regime to stem the export surge from China and other Asian nations. The US has been blaming China for its trade deficit and even the loss of some 2.5 million jobs; of course, a good part of the latter could be just political rhetoric.

The West is getting increasingly nervous about China and, for that matter, with developing countries such as India as they start to stand up for their interests in trade talks. An appreciating yuan or rupee is probably better than the West raising import duties that would distort trade flows. It suits China to shift to a managed float regime, with yuan linked to a basket of currencies within a trading band of 0.3 per cent, as its economy could do with cheaper imports of metals and crude oil. Does that make it better than the managed float of the rupee by the Reserve Bank of India with no officially-set band, as the market expects the yuan to appreciate in small doses? Any answer can only be in the realm of guess-work, as the closed economy offers the outside world processed and sanitised information. Most Asian currencies, including the rupee, have moved up against the dollar and observers are not sure of the toll on India-China trade or on investment by Indian businesses in China which has become something of a fad. The rising trade with China may soon enough see computer screens flashing a yuan-rupee rate, providing a definitive peep into the interest and inflation trends in the Middle Kingdom.

With dollar inflows holding firm, the RBI was finding it hard to keep the value of the rupee down against the dollar; now with the yuan's rise, it has one fewer reason to hold the rupee in check. Having long faced the criticism that it was deliberately keeping the rupee down against the dollar, the RBI and government banks need not zealously buy dollars in the forex market against rupees and then mop up the excess rupee funds under the Market Stabilisation Scheme (MSS) by floating government paper. Some think that the RBI will favour an orderly climb of the rupee against the dollar by, say, about five paise a day but not a pole-vault, with dollar touching Rs 43 in two months. But market players are not an orderly lot. The majority view is that the chances of the rupee turning weak has become a touch remote. A rising rupee could see exporters dump dollars spot, with importers holding open positions. Exporters, especially in textiles and Information Technology sectors, are bound to whine but will have to live with it. Crude and commodity imports will put less pressure on domestic prices to hold inflation in the 5-5.5 per cent band that the RBI has wished for. If all this happens, there is little reason for the RBI to dribble with interest rates during the quarterly review of its annual policy statement on July 26