When a country pegs its currency to a bigger one like the US dollar, it in effect outsources its monetary policy to the operator of that other currency. This confers several benefits, including the enforced discipline of the other, presumably more rigorous monetary regime and the simplicity of letting someone else stress over controversial policies like QE.
But of course there’s a downside to letting someone else handle important things, and in this case it’s that when the other country screws up its own monetary policy, the pegger becomes collateral damage. A case in point is China, which links its currency, the yuan, to the US dollar. As the next chart illustrates, the relationship was fairly stable in the past year.
But during that time the dollar has soared against other major currencies, which means so has the yuan. Here it is versus the euro:
Since Chinese exports are priced in yuan, they became around 20% more expensive in the past year. This, according to both basic economics and common sense, should result in Chinese companies selling less to foreigners and the Chinese economy slowing down. Let’s see how that worked out:
April 15, Reuters:
