The central bank in China agreed to loosen its currency band for the first time in five years, liberalizing its currency exchange rate and allowing it to become more market focused by doubling the band to 1% from .5% versus the U.S. dollar.
The policy change will make it easier for the Chinese central bank to control inflation and assist the Chinese economy.
The last time the Chinese government expanded their trading band was in May 2007 when it was expanded by .3%.
Jim O’Neill, chairman of Goldman Sachs Asset Management in London, was quoted in Bloomberg as saying that the decision adds to confidence of a soft landing in China.
Meanwhile, a U.S. official from the U.S. Treasury Department suggested that the U.S. was hoping for more progress to correct a misalignment of the currency exchange rate.
“While we welcome the progress to date, the process of correcting the misalignment of China’s exchange rate remains incomplete, and further progress is needed” the official stated.
For years the United States has criticized Beijing for depreciating the yuan versus the U.S. dollar. The yuan rarely tested its previous tighter currency trading band before it was doubled today.
China’s trade deficit reached a record of 295 billion for 2011.
The yuan has appreciated .14% thus far in 2012 against the U.S. dollar and 8.3 % since 2010 when Beijing depegged its currency from the U.S.
The wider currency band has set a weaker reference point for the yuan’s value versus the U.S. dollar but it allows market forces to more easily determine the direction of the yuan.
Last week China released their 1st quarter GDP report for 2012 which showed 8.1% growth for the quarter, the weakest growth rate in 3 years.
Today the yuan has declined versus the U.S. dollar.
Minutes after the European markets opened today, Spain’s yield on its 10 year bond rose again to a concerning level. Spain’s 10 yr. bond is currently up .83 to 6.08%, the highest level since last November. On Thursday Spain will have bond auctions with their 2 and 10 year bonds.
The euro is currently trading at a low versus the U.S. dollar that has not been reached since January 23rd, according to Bloomberg.