MUNICH – Because China has pegged its undervalued currency, the renminbi, to the dollar, every weakening of the dollar in the wake of America’s financial crisis has also meant a weakening of the renminbi vis-à-vis other world currencies. But is China really to blame for the eruption of a global currency war?
The central banks of South Korea, Brazil, Taiwan, Japan, Switzerland, and many other countries are now buying dollars in order to protect their own currencies against revaluation and thus to defend their exports. Europe also became nervous after the euro exchange rate rose to more than $1.40, far beyond the purchasing power parity (PPP) rate of $1.17.
The United States is now taking drastic steps against China, and is making provisions for a trade war. Congress has authorized the President to impose import duties on Chinese products if China remains unwilling to increase the value of its currency substantially against the dollar.
But the undervaluation of the renminbi, which is currently 45%, has persisted for many years. So why is the US suddenly acting so aggressively? Why didn’t America take action much earlier?