China adjusts currency fluctuation bands

In the latest chapter of the revaluation saga, China will allow the Yuan to fluctuate more against most major currencies, excluding the USD. While this move has already ignited speculation among currency traders that another revaluation is imminent, closer analysis reveals this latest decision was motivated chiefly by practical considerations. For all intents and purposes, the Yuan remains pegged to the USD but can freely fluctuate against other currencies.

When China revalued the Yuan in July, it announced that the Yuan would not be permitted to fluctuate by more than 1.5% against non-USD currencies. In a recent trading session, however, the Euro appreciated almost 1.5% against the USD. If the Euro had appreciated further, it would have created a triangular arbitrage scenario whereby the Yuan-USD and Euro-USD exchange rates were not consistent with the Euro-Yuan rate. In order to prevent such a situation from occurring, China will now allow the Yuan to fluctuate up to 3% against major currencies.

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