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U.S. Yuan Bill: From Currency War To Trade War

|Includes: Market Vectors Chinese Renminbi/USD ETN (CNY), CYB, FXI, FXY, QQQ, SPY, UUP
Just days after the reports of possible currency wars between nations have been in the limelight, after the drop in the US Dollar's value was attributed to the Federal Reserve’s willingness to continue quantitative easing, Beijing's Foreign Ministry has warned that the upcoming House of Representatives bill to penalize China for not letting the Yuan rise faster could seriously affect bilateral ties between the two giant nations.

The comments come after The U.S. House of Representatives began debate on legislation to put pressure on China to let its currency rise faster, fanning the flames of a long-running dispute over trade and jobs. The measure is most likely to be discussed in the U.S. congressional election on Nov. 2, with voters worried about their jobs and a sluggish economy. The Bill if passed would open the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.

China's Foreign Ministry spokeswoman Jiang Yu has suggested that the US Congress should avoid steps that could harm relations between the two nations with Beijing being strongly opposed to the bill. Currency and economic experts don’t expect China to take things lying down and might be forced to retaliate if the bill is indeed signed into a law by President Obama. China Meanwhile has adopted a wait and watch approach as of now, but the if the statements coming out from Chinese sources are a barometer of the Chinese mindset, then we might be just sitting at the transition of currency wars into an ego and Trade war.

Obama and Chinese Premier Wen Jiabao had earlier discussed the issue about China's currency and huge trade surplus on the sidelines of the U.N. General Assembly last week.

US Vs China

Although its not just the yen but the Yuan as the depreciation of the Yuan compared to the Dollar has caused a growing tension between The U.S and China in recent weeks. The U.S is blaming the cheap Yuan for its economic issues and even financial sanctions against China have been on the cards. If these two giant economies are starting to threaten each other, the impact on the ever-slowing recovery could be enormous.

Meanwhile China's vice commerce minister has described the U.S. House of Representatives Ways and Means Committee approved bill that would let the United States apply duties on goods from countries with undervalued currencies as being "redundant". The Yuan rose against the dollar on Monday even though the central bank lowered its mid-point after nine days of stronger fixings in the face of growing U.S. pressure on Beijing to let the currency rise faster.

China is the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July. China's central bank meanwhile fixed the Yuan’s daily mid-point versus the dollar at a weaker level on Thursday.

China's tight leash on the Yuan is under intense scrutiny as countries around the world look to export their way back to economic health, raising concerns they will intentionally weaken their currencies to gain an edge.

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