Yuan To Move Higher, Faster

The yuan is very likely to move up higher and faster within the next few days. This bodes very well for strong all around Asian currencies as they are all keeping in step with the yuan's rise. This will also drive back funds into Asian assets. The likelihood of a stronger yuan was put in place by by the US politcos. Efforts to put sanctions on China over trade policies seen as hurting the US gained steam on Capitol Hill as a second congressional panel approved a bill aimed at pressuring Beijing to revalue its currency. The Senate Banking Committee, on a 17-4 vote, moved to tighten the government's definition of currency manipulation and make it harder for the Bush administration to avoid labeling a country a currency manipulator. Under U.S. law, if a country is declared a currency manipulator, the Treasury Department must either initiate bilateral negotiations or pursue a claim with the International Monetary Fund. The committee's legislation would require the Treasury to do both. If those avenues fail, the Treasury would have to file a complaint with the World Trade Organization, which has greater enforcement powers than the IMF.

The action follows Senate Finance Committee approval last week of a bill that would allow companies hurt by currency manipulation to seek temporary relief in the form of antidumping penalties on imports from the offending nation. The White House, wary of antagonizing China, has threatened to veto both measures. This is exactly the joker card that Paulson needs to show it to China to get what he wants them to do. In order to avoid a politically charged atmosphere, we should see Beijing allowing the yuan to rise faster. Nobody wants a bloodbath now, esp when the US elections are moving into 3rd gear and China is preparing for the best Olympics you have ever seen.

Henry Paulson has warned congressional leaders that such bills might violate World Trade Organization commitments and trigger a trade war. But the White House has stopped short of calling the legislation a WTO violation. All said, this allows Paulson to play good cop-bad cop to both sides. Likely winners, Paulson and Asian markets.