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China Revalues But What Next?

China revalues - at www.moneyweek.com - the best of the international financial media

Just a day after China reported surging GDP growth at 9.5% for the first half of the year in comparison to a year earlier, the Chinese government has surprised all not least US treasury secretary John Snow by revaluing its yuan. The revaluation may only be gradual at 2.1% - but this is the first indication that the country has given that it will abandon the decade-old peg against the dollar, said Alan Wheatley on Reuters.com. The yuan has been fixed at around 8.28 per dollar since 1996. Following the change yesterday, the currency has moved to a managed floating regime, which will be tied to an unspecified number of currencies likely consisting of China's main trading partners. The yuan will now be valued at 8.11 to the dollar.

The Chinese revaluation will not only impact on America: a number of Asian countries, worried that if they were to revalue their currencies they would give China the competitive edge, are now sure to follow suit. Malaysia has already moved to a managed float following China's announcement yesterday. 

So what's the best bet for forex investors? As it is, the Japanese Yen has already jumped some 2% on the news, while the dollar struggled to make ground, as traders fretted that that Asian central banks may start to sell off their dollar holdings. Remember that in order to weaken their own currencies, these banks have invested heavily in dollars. So while it's not clear yet whether China will sell its dollar stock, says Lex in the FT, investors may benefit the most from buying the yen versus the euro.

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