A new heavyweight is flexing its muscles in the $3 trillion-a-day market for currency trading: China.
Speculators, for instance, bet that other Asian currencies, especially those that are more freely traded, will rise relative to the dollar when the yuan is also allowed to. Above, yuan notes are counted at a branch of the Bank of China in Beijing.
It is an unusual sort of influence given that the Chinese currency, the yuan, doesn't readily trade in foreign-exchange markets and its value is fixed against the dollar.
Yet China's economy, and speculation that the yuan's value vis-a-vis the dollar will soon be allowed to rise, is moving currencies around the world.
This is especially true in Asia, where the U.S. dollar has long reigned as the most consequential currency. It's also making waves in countries that are major raw-materials suppliers to China such as Australia, Canada and Brazil.
"The U.S. dollar used to be the center of the earth," says David Bloom, currency strategist for HSBC in London. "Now China is becoming a very powerful influence on the way currencies are working."
Speculators, for instance, bet that other Asian currencies, especially those that are more freely traded, will rise relative to the dollar when the yuan is also allowed to.
Investors believe expectations of yuan appreciation give central banks in these countries the leeway to let currencies strengthen without fear of losing export competitiveness. So far this year, the Malaysian ringgit is up 7.5% against the dollar and the Korean won and Indian rupee are both up around 5%.
"We've reached a junction where the dollar and yuan are equally important in Asia," says Hai Xin, head of Asia for Overlay Asset Management, a unit of BNP Paribas Group that hedges currency risk for large investors. "Before, I'd never hesitate to say the U.S. dollar is the most important currency. Now I think it's both."
To be sure, the U.S. dollar is still the undisputed top dog. It's the most heavily traded currency in the world and as the recent financial crisis proved still the denomination that investors flee to in tough times.
Some say talk of the yuan's prominence is overblown. "This is a country that has never had a real floating exchange rate and has no experience responding to markets," says Fraser Howie, of CLSA Asia-Pacific markets and a longtime critic of China's financial system.
Even so, China's growing currency clout is showing up indirectly. For instance, derivatives that investors use to bet on the yuan's direction have become popular. And these yuan bets are starting to move other currencies, too.
Deutsche Bank currency strategist Mirza Baig says that on days when trading is especially volatile, the Singapore dollar moves in tandem with the yuan bets. The Malaysian ringgit, Taiwanese dollar and Korean won are also high on the list of currencies affected by the yuan.
The so-called dollar bloc Australia, Canada and New Zealand, whose currencies have long been considered closely tied to the value of the U.S. dollar are more sensitive to China these days as well. A large part of that is China's demand for commodities from those countries. Canada has seen its currency rise to parity with the dollar in recent months, thanks in part to China's demand for its raw materials, including oil and timber.
In theory, the strength of currencies broadly reflects the relative growth rates of underlying economies. China is leading the global recovery, part of the reason many economists, especially in the U.S., think the yuan is undervalued at its current level of 6.83 to the dollar, where it's been since August 2008.
China is by far the largest economy whose currency doesn't float. That's despite China being set to overtake Japan this year as the world's second-largest economy after the U.S.
China's economic output will be more than $5 trillion, or around 9% of the world's economy, according to the International Monetary Fund. The U.S. is a quarter of the world's economy. The euro zone is 20% and Japan is 9%.
The yuan is also becoming a more important currency to the world's central bankers. The lack of movement in the yuan has put pressure on central banks in countries that compete with China for world trade.
As economies recover in Asia and Latin America, some policy makers are reluctant to raise interest rates to fight inflation, for fear the higher rates will also mean stronger local currencies. Strong currencies make their exports more expensive compared with China's
Central banks are key players in currency markets, as they allocate their massive reserves. The dollar is still dominant, making up 62% of the world's central-bank reserves, according to the IMF.
The yuan, which is almost impossible to trade, is many policy changes away from being the kind of currency that risk-averse central bankers want to hold.
But central banks or sovereign wealth funds from Malaysia, Norway and Singapore have received special quotas from the Chinese government to allow them to gain a bit of exposure to China's currency. The bet is that holding yuan-denominated assets is an important feature of a diversified national reserve.
Speculators, for instance, bet that other Asian currencies, especially those that are more freely traded, will rise relative to the dollar when the yuan is also allowed to. Above, yuan notes are counted at a branch of the Bank of China in Beijing.
It is an unusual sort of influence given that the Chinese currency, the yuan, doesn't readily trade in foreign-exchange markets and its value is fixed against the dollar.
Yet China's economy, and speculation that the yuan's value vis-a-vis the dollar will soon be allowed to rise, is moving currencies around the world.
This is especially true in Asia, where the U.S. dollar has long reigned as the most consequential currency. It's also making waves in countries that are major raw-materials suppliers to China such as Australia, Canada and Brazil.
"The U.S. dollar used to be the center of the earth," says David Bloom, currency strategist for HSBC in London. "Now China is becoming a very powerful influence on the way currencies are working."
Speculators, for instance, bet that other Asian currencies, especially those that are more freely traded, will rise relative to the dollar when the yuan is also allowed to.
Investors believe expectations of yuan appreciation give central banks in these countries the leeway to let currencies strengthen without fear of losing export competitiveness. So far this year, the Malaysian ringgit is up 7.5% against the dollar and the Korean won and Indian rupee are both up around 5%.
"We've reached a junction where the dollar and yuan are equally important in Asia," says Hai Xin, head of Asia for Overlay Asset Management, a unit of BNP Paribas Group that hedges currency risk for large investors. "Before, I'd never hesitate to say the U.S. dollar is the most important currency. Now I think it's both."
To be sure, the U.S. dollar is still the undisputed top dog. It's the most heavily traded currency in the world and as the recent financial crisis proved still the denomination that investors flee to in tough times.
Some say talk of the yuan's prominence is overblown. "This is a country that has never had a real floating exchange rate and has no experience responding to markets," says Fraser Howie, of CLSA Asia-Pacific markets and a longtime critic of China's financial system.
Even so, China's growing currency clout is showing up indirectly. For instance, derivatives that investors use to bet on the yuan's direction have become popular. And these yuan bets are starting to move other currencies, too.
Deutsche Bank currency strategist Mirza Baig says that on days when trading is especially volatile, the Singapore dollar moves in tandem with the yuan bets. The Malaysian ringgit, Taiwanese dollar and Korean won are also high on the list of currencies affected by the yuan.
The so-called dollar bloc Australia, Canada and New Zealand, whose currencies have long been considered closely tied to the value of the U.S. dollar are more sensitive to China these days as well. A large part of that is China's demand for commodities from those countries. Canada has seen its currency rise to parity with the dollar in recent months, thanks in part to China's demand for its raw materials, including oil and timber.
In theory, the strength of currencies broadly reflects the relative growth rates of underlying economies. China is leading the global recovery, part of the reason many economists, especially in the U.S., think the yuan is undervalued at its current level of 6.83 to the dollar, where it's been since August 2008.
China is by far the largest economy whose currency doesn't float. That's despite China being set to overtake Japan this year as the world's second-largest economy after the U.S.
China's economic output will be more than $5 trillion, or around 9% of the world's economy, according to the International Monetary Fund. The U.S. is a quarter of the world's economy. The euro zone is 20% and Japan is 9%.
The yuan is also becoming a more important currency to the world's central bankers. The lack of movement in the yuan has put pressure on central banks in countries that compete with China for world trade.
As economies recover in Asia and Latin America, some policy makers are reluctant to raise interest rates to fight inflation, for fear the higher rates will also mean stronger local currencies. Strong currencies make their exports more expensive compared with China's
Central banks are key players in currency markets, as they allocate their massive reserves. The dollar is still dominant, making up 62% of the world's central-bank reserves, according to the IMF.
The yuan, which is almost impossible to trade, is many policy changes away from being the kind of currency that risk-averse central bankers want to hold.
But central banks or sovereign wealth funds from Malaysia, Norway and Singapore have received special quotas from the Chinese government to allow them to gain a bit of exposure to China's currency. The bet is that holding yuan-denominated assets is an important feature of a diversified national reserve.
