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Currency moves and trade taxes

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

The Chinese yuan has weakened against the US dollar. What does this mean?

China has almost no dollar debt. The currency moves do not matter to China's debt burden.

If the yuan weakens against the dollar, and other currencies do not, China may make trouble for itself. A weaker yuan helps offset the US tax on goods from China. However, trade tensions so far pitch the US against the rest of the world. Other countries still trade nicely with each other. If the yuan weakens alone, other countries may see China's move as hostile and retaliate. A weaker yuan would also raise the price of commodities in China. That would hurt the profits of China's exporters.

If the dollar strengthens against all currencies, China benefits more. Dollar strength would partially offset taxes on goods from China and all other counties. As everyone benefits, there would be no reason for other countries to resent China. A stronger dollar should not push up the price of commodities in China either.

China's exchange rate move earlier this year was a stronger dollar story. That helps China's economy. Recent moves were more yuan weakness. This is less helpful, but we do not expect yuan weakness to last.