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Dollar vs. Yuan – Obama Administration Blinks First in Currency War with China

In the first round of a brewing currency war with China, the Obama administration has decided to back away from a confrontation with the Chinese government… at least for now.

There has been growing anticipation over the Treasury Department’s decision to openly accuse China as a currency manipulator. Last Friday, the administration of President Barack Obama decided to hold that announcement in abeyance pending the U.S. congressional elections and the G20 summit in South Korea in November 2 and 11, respectively.

According to a report by Reuters, the decision by the Obama administration is an indication that it is  willing to pursue diplomatic channels in resolving the growing controversy.

Both the U.S. and the European Union are accusing China of intentionally keeping the value of the Chinese Yuan low to boost Chinese exports – a move that impacts jobs and competitiveness in the American and European markets, Reuters said.

A currency war “could potentially lead to a trade war and affect long-term interest rates,” Reuters noted, citing also that “In July, China held $847 billion in U.S. government debt.

To understand the repercussions of the conflict, the Joong Ang Daily gave the following perspective:

The currency war emerged “from a conflict of interest between the United States and China.” America is struggling to manage a massive fiscal deficit and a huge foreign debt, while China “has been raking in profits from its biggest export market, the U.S.” by keeping the value of the yuan down. As a strategy, the U.S. is looking at weakening the value of dollar while hoping that China will strengthen the value of the yuan.

The Chinese government countered “The Chinese yuan should not be a scapegoat for the United States’ domestic economic problems,” Yao Jian, spokesman of the Commerce Ministry said on Friday. Beijing argues that any quick attempt towards currency reforms could have a disastrous impact on its export-driven economy, the Reuters report said.

The Treasury Department said that G20 summit in Seoul would give world leaders a chance to address the situation as it stressed that addressing the looming currency war is not just the responsibility of the U.S. and China.

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