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Showdown at the White House

Jan. 18, 2011 9:59 AM ETUUP
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President Obama will meet with the Chinese President Hu Jintao in Washington today. Recently, President Hu Jintao said that the U.S. Dollar is no longer the worlds reserve currency. Many politicians in the United States have stated that China must allow their currency called the Yuan to be traded in the open market and no longer peg itself to the U.S. Dollar. China currently allows a small percentage of their currency to float in the open market.

China makes a very good argument for not allowing their currency to float openly. First, the Chinese own nearly $1 trillion of U.S. Debt. Second, the Chinese continue to state that the Federal Reserve Bank continues to try and drive the U.S. Dollar lower by creating massive cash reserves via quantitative easing and U.S. debt purchases. This time around the United States politicians that want China to float their currency seems to be stuck between a rock and a hard place. It is important to remember that American consumers buy most of the products that the Chinese make. If the Chinese currency becomes more expensive their products would become more expensive in the United States. At this time it really looks like a stale mate between the U.S. and China when it comes to trade policy. Both countries seem to need each other. The Chinese need to sell their goods to the United States. The United States needs China's cheap products and they also need China to continue to fund the U.S. debt which is now $14 trillion.

This morning the U.S. Dollar Index is declining again by 0.42 cents to $78.91. Last week the U.S. Dollar Index Index declined by over 2.00 full points. Folks, that is a lot of meat and potatoes in the currency world. Since 2001, the rallies that have occurred in the U.S stock markets have taken place on the back of a declining U.S. Dollar Index. In 2001, the U.S. Dollar Index traded as high as $121.03. Investors can trade the Powershares DB U.S. Dollar Index Bullish Fund(NYSE:UUP) if they believe the dollar will increase in price. Investors can also trade the Powershares DB U.S. Dollar Index Bearish Fund(NYSE:UDN) if they believe that the U.S. Dollar Index will decline in price.

Nicholas Santiago

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