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dollar-yuanI would like to explore the 2008 Summer Olympics which are going to be in Beijing, China and the ramifications for Forex traders. The Olympics are not only a business opportunity (The 2002 Olympic Winter Games held in Salt Lake City, Utah made the city over 100 Million Dollars) they are a chance for a country to reshape their image for the entire world. In 2004, Greece spent over 11.4 Billion Dollars on infrastructure to improve their country and host the games. With the current Chinese economy, expect to see 2004 dwarfed in comparison.There is no doubt China is a superpower, but expect to be blown away by the 2008 Summer Olympics. To see how the Olympics will affect Forex investors, we must first look at China today.

Currently, China’s currency is pegged to America’s currency. What this means is that the Chinese government has decided to keep the exchange rate of Yuan to Dollars fixed, despite any changes that the market might naturally want. The exchange rate, as we know, determines the costs of goods between countries, for example, the exchange rates determine the cost that Americans pay for Chinese goods. China has been keeping the Yuan artificially low in recent years to facilitate “cheap imports” for American consumers. When we hear on the news about an American “trade deficit” with China, the cause of this is solely because of the exchange rate of Yuan to Dollars. In recent months, the American economy has been showing signs of faltering and the U.S. Dollar has been weakening. If the Yuan wasn’t fixed to the dollar, the dollar would be getting weaker against the Yuan, which would make Chinese imports more expensive for U.S. consumers. To keep the Yuan artificially low, China had to decrease the supply of U.S. Dollars. To do this, China bought up 9 trillion dollars worth of American securities.

So what does the current situation have to do with the Olympics? If China uses the 2008 Olympics as a way to establish itself as a world superpower and step out of America’s shadow, expect some serious ramifications for Forex traders. China could float their currency against the Dollar and dump their Nine-Trillion Dollars worth of securities. Then, expect to see OPEC switch over to the Yuan. And then, say goodbye to the U.S. Dollar. However, China is enjoying the stability and all the benefits of their cheap Yuan, so China might not ever float their currency. The one thing that is for sure: Forex investors can not afford to ignore China. One thing China doesn’t have control over is OPEC. Even if the Yuan stays fixed to the Dollar, OPEC might still switch over to the Yuan. If OPEC changes to the Yuan, the U.S. Dollar might get to be too weak for even China to prop up, and China might be forced to float their currency.

How do you think Forex traders will be affected by the 2008 Summer Olympics?

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2 Comments »

Comment by Jon
2008-03-10 03:46:51

Interesthing first post. The situation in between China and the USA is indeed quite complex. It is true that both country depend on each other up in different ways. The USA do need China to keep on buying american securities otherwise China could turn around and sell all it’s Forex holding in US dollars and completely demolish the value left in the dollar and severely impact the USA economy. However China need the US consumers to buy all their manufactured goods. So overall it’s a double sword situation and there must be a highly political game going on in the background.

As for OPEC, they have discussed switching to Euros, Rubles and even Gold. I havn’t heard the mention of Yuan’s yet, but anything is possible depending on how things turn out.

The Olympics will definitely be huge for China and I believe has more significance than most recent Olympics as they are regaining their superpower status (which they had at times in the past).

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Comment by Joaquin
2008-03-10 17:33:07

Hello Jon,

I agree with your assessment of the situation, however, with the rise of India as an industrialized nation, China might stop relying on U.S. Consumers to buy their products, especially if the dollar keeps getting weaker and weaker. Only time will tell, and I am looking forward to both the Olympics as well as the next few months as a Forex Investor.

-Joaquin

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