Publish date:

Chinese Yuan Strengthens as Peg Ends

The Chinese yuan strengthened modestly against the U.S. dollar following China's decision Saturday to permit greater currency flexibility.

The U.S. dollar started the week mostly steady against its European rivals, though the buck tumbled against its risk-sensitive counterparts in Australia, New Zealand and Canada, following China's weekend decision to allow its currency to strengthen.

Since July 2008, China had essentially tethered the yuan to the U.S. dollar to help protect the world's third-largest economy from the global financial crisis. The move Saturday by the People's Bank of China, the nation's central bank, boosted investor appetite for riskier assets on the notion a freer Chinese currency might stimulate global economic activity.

Consequently, the greenback fell to 5-week lows against Aussie, kiwi and Canadian dollars. Earlier overnight, the U.S. currency neared a one-month low against the euro, though the buck pared some of its previous losses at the onset of the North American session.

Despite the single currency's recovery from its lowest in more than four years earlier this month, sentiment toward the common unit remained fragile, given ongoing concerns about high debt loads in the bloc's southern regions, which still pose risks to the global economy.

The Canadian dollar was among the top performing major currencies against the U.S. dollar, rising to its highest since mid May against the American dollar. The loonie, like most currencies that are sensitive to the global growth outlook, firmed on the wave of positive market confidence that was fueled by China's decision to allow its currency to appreciate against the greenback. There is no North American economic data due out Monday.


TheStreet Recommends

: The Chinese yuan strengthened modestly against the U.S. dollar following China's decision Saturday to permit greater currency flexibility. The move comes before this weekend's G20 summit of finance leaders in Toronto. China's central bank, the People's Bank of China, had essentially pegged the yuan to the greenback since July 2008 in an effort to ease the harmful effects of the global financial crisis on the Chinese economy, the world's third-largest.

The move by the PBOC's signaled to markets that China's economy is on more solid footing. China's decision should also help to ease trade tension with the U.S., who has voiced strong opposition to China's exchange-rate policy toward a weaker yuan, which gives Chinese exports an added boost.


: A dearth of global data to consider on Monday saw investors pay added attention to risk sentiment. Earlier Monday, the single currency had risen to its highest in about a month against the U.S. dollar, boosted by the rise in risk sentiment that accompanied China's decision to allow more exchange-rate flexibility. Still, the single currency's tone is likely to remain fragile, despite its continued recovery from a March 2006 low against the dollar earlier this month.

Persistent concerns about the risks the continent's debt crisis poses to the global economy should somewhat limit the euro's upside against its top rivals. Though generally steady against the U.S. buck, the euro fell to a new record low against the Swiss franc, a currency that continued to benefit from the Swiss National Bank's decision last week to lighten its grip on its currency management policy.


: The Australian dollar, along with the Canadian and New Zealand currencies, rose to 5-week peaks against the U.S. dollar, finding key support from generally higher global stocks, which tends to bolster commodity-based currencies. China's decision to allow its currency to trade in a broader band against the dollar helped improve market sentiment on the view an unshackled currency would be a positive for the global economy.