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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: GST who wrote (48254)12/27/2005 9:25:54 PM
From: bond_bubble  Read Replies (2) of 110194
 
What if China sets the interest rate at 0% and US sets the rate at 7%? Will Yuan still appreciate compared to USD? Ofcourse US also has wealth and infrastructure. RMB appreciation is not guaranteed. It will depend on the environment at that time. China might seem like to have an advantage and ofcourse China can screw up that position - just like US is doing today. I'm more inclined to think that there will be volatility. I would consider USD depreciation in 2004 by 20% and then appreciation by 20% in 2005 as high volatility.

The mechanism could be as follows: Let's say China has higher inflation and so yuan devalues first or the interest rate goes up. Then there is inflation in US - then USD falls and rates rise. Or, before we see higher inflation, deflation kicks in. Then the currency falls as GDP falls. Then another country gets deflation and so on. I think, this is likely to be the scenario.
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