What Does the Peg Mean for the US?

For those wandering what the recent discussions of the Yuan pegged to the dollar have to do with the US economy, the Wall Street Journal has a very good Q&A that helps explain a lot of the reasons why pushing China to stop pegging the Yuan against the dollar will be good for the US economy.

Today the PRC uses a secret basket of currency to determine the value of the Yuan, but in reality it is still pegging against the dollar at a little more then 8 Yuan for every dollar. This means that the Chinese keep their currency artificially weak against the dollar.

A weak currency decreases your purchasing power while increasing your selling ability. This is the reason why when the dollar lost a lot of value earlier in the year, it was a lot more expensive to be an American tourist, while at the same time the manufacturing sector boomed do to the decrease in the value of their goods when compared to other currency.

Again this is why the EU was so scared when the euro became so strong, and caused their manufacturing sector to go into a sharp decline.

China avoids this hassle by keeping their currency locked in to the dollar at an artificial rate, thus ensuring a weak currency and cheap products for export.