Ifm China'Syuan Move

China’s Yuan Move Highlights

Importance of Exchange Rates for

Policy Makers

Central banks lack traditional levers, such as rate cuts, to reduce

borrowing costs and spur growth

Shockwaves from China’s yuan devaluation will be felt by all kinds of investors, and will likely prompt

questions from U.S. politicians. Heard on the Street’s Aaron Back and Abheek Bhattacharya discuss.

Photo: Reuters

By

BRIAN BLACKSTONE

Aug. 11, 2015 9:18 a.m. ET

FRANKFURT—China’s unexpected move Tuesday to devalue its currency highlights a growing

trend among policy makers in Europe and beyond: the importance of exchange rates as a means

to juice economic growth and keep inflation from weakening too much.

ANALYSIS

It also underscores how sensitive central bankers are to each other’s monetary policies. In

China’s case, expectations of tighter monetary policies by the Federal Reserve have prompted a

rise in the value of the U.S. dollar. Given that China’s currency, the yuan, is linked to the dollar’s

value, it has risen as well against the euro and many emerging market currencies, weighing on

Chinese exports.

Analysts don’t see China’s move as sparking a wider currency war, but rather as an indication

that exchange rates will continue to play a central role in efforts by policy makers to protect

fragile economies.

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“The sensitivity about exchange rates is generally very high among central banks,” said Beat

Siegenthaler, global macro adviser at UBS Investment Bank in Zurich. “The very limited choice

of policy tools that central banks have means the exchange rate has become a much bigger deal.”

China’s central bank on Tuesday changed the way the yuan is fixed against the U.S. dollar,

which will now be based on how the currency closed in the previous trading session. That

pushed that fixing rate against the U.S. dollar down 1.9%. The decision came in the wake of

recent data showing China’s exports fell in July from a year earlier....