Yuan devaluation affects Fed rate hikes

13 August, AtoZForex.com, Lagos – How the Yuan devaluation affects Fed rate hikes? Judging from the sudden action, apparently China had had enough as the country devalued its currency allowing it to slide for three days. The People's Bank of China stepped in to support the Yuan in the final minutes of trading Wednesday as the Yuan dropped 2 percent against the U.S. dollar, as reported by Dow Jones.

China seems to be propelling towards a more market-based regime by decoupling the Yuan from the dollar. In a bid to establish the Yuan as a reserve currency, the government will have to relax control on the Yuan and allow market forces to play a larger role in determining its value as clarified by financial institutions like the International Monetary Fund.

The current scenario is likely to creating confusion as the Yuan devaluation affects Fed rate hikes. It is generally expected that the Fed will raise rates in September, but this becomes an increasingly difficult decision as much of the world lowers rates and devalues currency. Europe and Japan are both also easing monetary policy. The ripple effect of the falling Yuan is a drag on other growth-linked currencies, including Australia and New Zealand.

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Analysts’ Views

Nuveen Asset Management's Bob Doll said on CNBC Squak box: "Everybody knew September was a more than 50 percent chance the Fed was going to go," "You've got to wonder, is this going to make it less than 50 percent? Are they really going to listen to things outside the U.S.?" According to Doll, that slowdown will affect Asia-Pacific first, Europe next, and the United States the least, he said.

"The optimist in me says, don't forget the United States is 87 percent a domestic economy, which is generally doing better. The consumer is doing a little better. Jobs have improved. I don't want to take anything away from the concern. It's a legitimate concern. If this develops into a currency war, we've got issues. There's not question about it," he said.

China is not the first mover

Haibin Zhu, chief China economist for JPMorgan Chase, told "Squawk Box" that China is not the first mover, but the last man standing following currency depreciation in Europe, Japan and emerging markets.

He pointed out that the yuan has appreciated significantly in the last 12 months because it is linked to the strengthening dollar, making its exports more expensive and less attractive. China's first reason for letting the yuan float more freely, leading to its depreciation, is to reduce pressure on China's exports.

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