The Fed’s Secretary Paulson (ex head of Goldman Sachs – further evidence of the best man for the job or the continuing cosy relationship between investment bankers & governments!) was recently in China attempting to persuade the Chinese to revalue the Yuan – it is very low and continues to make Chinese goods very cheap and a continuing threat to manufacturing. However, sino-american relations are not exactly friendly at present as the chinese believe they have bought into assets which have falling steadily for some time. This includes their recent investment in Blackstone private equity, whose share price has fallen over 20% since floating in April.
The impact on the currency market from a souring of this relationship cannot be understated. The chinese could start a dollar sell off which would batter the dollar even further. However, such action would also further devalue their dollar holdings and simply add to their woes.
Looking at the dollar index on the daily chart and weekly charts it looks like it still has some way to go. However, on the monthly chart it seems to have touched a low not seen since early 2005. Whether it continues down or begins to reverse is anyone’s guess. My advice would be watch the chinese – they have it in their power to make or break the dollar. In addition pay attention to the rhetoric from the presidential candidates and US congress once the summer holidays are over.