The US Dollar is the authorized currency of the United States and other foreign countries. In different countries, it is used as the official currency. Therefore, it value is very crucial both to the United States as well as to other nations in the globe. Being the most favorable form of currency in the world, the US Dollar is used as a mark for the value of other currencies. One of the most competitive upcoming currencies is the China Yuan. This is the official currency for the China Republic. Following the rapid economic growth of China, this currency is appreciating in an alarming rate in comparison to the US Dollar. It has become dominant in the market, leaving a lot to be desired for the US Dollar. Several analyses have been done to provide proper reasoning of the main reason of the growth of the Yuan in comparison to the depreciation of the US Dollar.
The United States of America being one of the world’s best economies, any behavior by the dollar would cause massive effects to the economy of the country. Every trade that occurs in the United States is based on the value of the Dollar. The key concern at this time is the effect of the depreciation of the Dollar in the manufacturing sector of the country. This is a very broad analysis that may be defined over several plants of manufacturing in the United States. This is following the US being a hub of several key industries which produce global products with main offices in the United States. Key factors that define the fate of manufacturing include demand and supply of products.
Performance of currencies is usually determined by the prevailing exchange rates in the market. For manufacturing, interest rates are very important to define what causes increased levels of investment in manufacturing, as well as the reduction in the echelon of investment following fluctuations of interest rates.
The US Dollar verses the China Yuan
The appreciation in value for the China Yuan, against the United States Dollar is following the weakening of the Dollar. Recently there have been dominant increases in value for the Yuan in comparison to the Dollar. On Monday, the China Yuan hit high more than the US Dollar as the central parity of Yuan per US Dollar was rated at 6.499. This was just before of the US-China Economic and strategic dialogue which opened the same day in Washington (“The Great Dollar Devaluation Disaster”, 2011).
There was a break of the symbolic ratio of 6.50 since 29th of April when the Central Bank had fixed its parity rate at 6.499 Yuan for every US dollar. The exchange rate of the Yuan has already changed by nearly 19 % against the Dollar from the start of this year (Brown, 2011).
Since June 19 2011, the Yuan has gained approximately 5 percent against the US Dollar (Brown, 2011). This was following the pledge by the central Bank that it would change its exchange rate to a more flexible exchange rate mechanism.
The US Federal Reserve has made a decision of keeping its low interest rate without changing for a long period. The reserve made a declaration that it would keep its six hundred billion dollar buying of bond intact from April to June. This was a very awful economic decision as it would impact the Dollar massively against other currencies. This would be mainly so, in comparison with the rating of the US Dollar against other currencies in other economies aspiring to be the most dominant in the world like the China Yuan. Su Guojian who is a researcher and the managing director of the Construction Bank international proclaimed that the US Dollar is becoming weak day by day. He explains the main factor behind the depreciation is the appreciation of the China Yuan. The decision by the US Federal Reserve of keeping the interest rate low was another collaborative cause of the appreciation of the China Yuan against the US Dollar (Brown, 2011).
Through this, the Dollar is losing attraction to most traders and may get into crisis if the Federal Reserve does not change on its poor monetary policy. There is a projection that if the policy is maintained, there will be an extensive fall of the Dollar’s dominance against the US Dollar.
The other main cause of the devaluation of the US dollar against the Yuan is the massive distribution the United States Dollar to the world by the US government. In this case, the government of China has kept this act low by trying to engage itself in the progress of the developing countries (Damon, 2011). This has acted as a boost to the Yuan currency while the US dollar depreciates.
There have been massive complains on activities that are being undertaken by the US government to curb the progress of the China Yuan. They are arguing that the government of China is allowing the Yuan to rise in high rate to reduce inflation. The United States is suggesting that China should aim at moving swiftly toward an exchange rate is market driven (Brown, 2011).
Increase of the domestic inflation for China has been another main cause of the appreciation of the China Yuan against the Dollar.
As discussed above measures are being undertaken to contain this problem. This is most critical by the United States as it tries to curb its low performance against the China Yuan.
US Manufacturing against the depreciation of the US Dollar
In the recent past, the government of the United States of America together with the media has been celebrating the improvement of the manufacturing sector in the country. They have proclaimed this as the main solution to the economic woes that the country is facing.
The devaluation of the dollar has had some benefits to the wealth of the United States. The growth in the manufacturing sector has been as a result of concrete decrease in wages and benefits for workers in the nation. The decline in wages and benefits among employees in the country has been as a result of the increasing devaluation of the US Dollar (Damon, 2011). This comes immediately after a loss of more than 2 million manufacturing jobs, which has left massive net job loss.
The manufacturing sector of the United States has developed at a rate of approximately 9.1% in the first quarter of 2012. This is incredible in comparison with entire economic growth rate of around 1.8 % of the entire economy. There has been extensive growth in exports form the United States.
The country is witnessing new companies everyday appealing to set plants in the US soil. This has been following the increasing growth rate of the US manufacturing sector. Companies like Boeing and Caterpillar have already set up their manufacturing sections in the country (Damon, 2011). This is a sign of the trust that the outside community has started developing in the United States.
At the time the united states lost nearly 5.8 million jobs with the worst hit sector being the manufacturing sector at 1.6 million jobs there were massive close downs of manufacturing companies in the United States of America. It was a challenge to the economy of the United States of America. With few employees left in employment, they were forced to accept little pay, which was characterized of poor working conditions (Damon, 2011).
There have been massive differences in costs of production within the US economy, as the cost of every unit of labor grew by one percent of the entire country. The manufacturing sector declined by approximately 3.5 percent.
Falling of a unit of labor in the US is going in line with the deflation of the US Dollar. This has been driving living standards for employees in the United States low from time to time. However, this has had a massive impact to the exports of the United States. There have been improved productions in the country, encouraging more manufacturing companies in the country (Carbaugh, 2011).
The depreciation of the dollar following the cheap money policy by the Federal Reserve, in addition to lowering the US exchange rate has flooded United States manufacturing sector with a lot of money. This money is very beneficial to the sector as it has added on productivity of the country.
Therefore, the decreases in exchange rate of the US dollar against other currencies in the world especially the major ones like pound and China Yuan, has been advantageous to the intensification of the manufacturing sector of the of the United States.
Exchange rates are very significant in different countries. They are usually the basis in which the relationship between different currencies is determined. The devaluation of the US dollar against the appreciation of the China Yuan has been the main debate. The United States is blaming China for letting Yuan become dominant over the dollar. Instead of passing blame, there are several things that governed may revisit to restore the strength that Dollar holds over other currencies (Damon, 2011).
One of the recommendable things would be consistent revisiting of interest rates. With constant rates of interest for a long time, there is a possibility that development in the exchange rate will remain intact while other currencies gain on their strength. Variations would aid in controlling the exchange rate even during crisis or inflations (“The Great Dollar Devaluation Disaster”, 2011).
The US government should also try to regulate the amount of donation it makes to the outside world in the form of cash (Carbaugh, 2011). This would regulate the supply of the dollar to the outside world, rendering it competitive among other currencies.
The government may also bring in extensive business relationship with other dominant currencies. This would curb competition and it would be easy for the dollar to dominate other currencies.
Low taxation would be one of the dynamics that would encourage both foreign and domestic investors. The government is also supposed to improve its relation to the rest of the world to allow transaction of business between the country and almost all countries in the world (Carbaugh, 2011). This would increase demand for products from the US, increasing the level of exports for the country. This would be a guarantee for the growth of the economy as well dominance of the Dollar against other currencies in the world.
Exchange rate is critical in determining how countries relate with each other in terms of trade. In the recent past the US dollar has experienced a lot of devaluation which has been countered by appreciation of the China Yuan among other factors like poor policies by the Federal Reserves of the United States. The devaluation has gone an extra mile of encouraging improvement of the manufacturing sector of the United States. This contrary to what people may expect in real life. However, measures are being installed to balance the value of the dollar against improvement of the manufacturing segment in the United States.
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Brown, Greg . " Trade Expert: Dollar Devaluation Necessary." America's Money News Page - Home. N.p., 7 Mar. 2011. Web. 1 Dec. 2012.
Carbaugh, Robert J.. International economics. 13th ed. Mason, OH: South-Western Cengage Learning, 2011. Print.
Damon , Andre . "US manufacturing rebounds on lower wages." World Socialist Web Site. N.p., 18 May 2011. Web. 1 Dec. 2012.