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Yuan Likely to Track Euro, Former Treasury Official Keidel Says

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Yuan Likely to Track Euro, Former Treasury Official Keidel Says
July 16, 2010, 12:01 AM EDT

July 16 (Bloomberg) -- China’s yuan is likely to track the euro more closely now that its peg to the dollar has been relaxed, said Albert Keidel, a former Treasury Department official and a senior fellow at the Atlantic Council.

Keidel, former acting director of the Treasury’s Asia office, said Chinese policy makers may decide to tie the yuan, also known as the renminbi, to a basket of currencies. If so, he said, the Chinese currency would follow movements in the euro, if not as closely as it previously tracked the dollar.

“Since the euro is quite low historically after the Greece scare, and it’s started to move up again, we’ve seen the renminbi strengthen a tiny bit,” Keidel said yesterday at an Atlantic Council forum in Washington. “If then we see problems with Greek and other debt and the euro tanks again, we might even see a very mild” devaluation of the yuan against the dollar.

The yuan has strengthened about 0.8 percent against the dollar since China announced on June 19 it would relax its two- year-old peg. China had kept the yuan stable at about 6.83 per dollar since July 2008, having allowed it to gain 21 percent in the previous three years.

Keidel also said Chinese officials will avoid any change to the banking system that risks economic turmoil. “It may be that too rapid liberalization of the financial sector in a country like China would jeopardize growth,” he said.

He predicted the Treasury would delay its next currency report, due in October, until after the U.S. elections in November. Keidel said officials in both countries may take advantage of “political brouhaha” to criticize each other’s policies in public while working collaboratively behind the scenes.

Currency Report

Treasury Secretary Timothy F. Geithner said this month he would be tracking “how far and how fast the renminbi appreciates” over the next few months. The Treasury released a currency report on July 9 that had been due on April 15, after delaying it until after a series of meetings between U.S. and Chinese officials.

In the report, the Treasury said the yuan was “undervalued” and pledged to monitor it for signs China is living up to its commitments to help rebalance the global economy. The report didn’t declare China or any other country to be a currency manipulator.

Edwin Truman, a former undersecretary of the Treasury for international affairs, said Chinese officials may have been surprised at how much their currency appreciated while pegged to the dollar in 2008 and 2009, because of the dollar’s rise against other currencies.

“They had a huge appreciation,” Truman told reporters yesterday at the Atlantic Council, a research organization focusing on international issues. “One would hope that they learned that actually was a mistake from their narrow perspective.”

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