From the front page of today’s WSJ:
A rising tide of inflation pressure around the globe is putting more stress on the beleaguered U.S. dollar, as central banks from China to Chile fight rising prices by letting their currencies strengthen.
China’s yuan has already appreciated nearly 3% against the dollar this year, putting it on pace to strengthen at more than double last year’s rate. Last week, Vietnam relaxed strict controls on its currency, the dong, allowing it to rise more rapidly against the U.S. currency.
In the Persian Gulf, news agency Zawya Dow Jones reported yesterday that the United Arab Emirates is re-examining its currency’s peg to the dollar, largely because having a stronger currency would help in its struggle against inflation. …
Strangely, the article fails to mention that allowing the yuan to appreciate against the dollar is something that U.S. politicians have urging China to do for several years now. Treasury Secretary Hank Paulson has made trip after trip to Beijing to ask Chinese officials very nicely, while Chuck Schumer and Lindsey Graham (and many others) have played the bad cop role back on Capitol Hill, pushing legislation that would punish China with trade sanctions if it doesn’t allow its currency to rise.
China has been extremely reluctant to move quickly on its currency, and as I wrote in a column last year, many Chinese believe that American pressure on the yuan is a nefarious attempt to send the country careening in recession like Japan in the 1990s.
But when it’s a matter of fighting domestic inflation, those concerns evaporate. Let the yuan rise!
What this seems to mean is that we may finally be in the last leg of the Great Millennial Dollar Repricing. Or the collapse of Bretton Woods II, if you prefer. We still have a ways to go, and there may be some ugliness along the way. But this needs to happen for the weird, imbalanced state of the global economy over the past decade to be replaced by something more sustainable.
Of course, it also means that the U.S. will be getting poorer relative to many developing countries around the world. But that relative shift actually already happened, it’s just that it’s only now being allowed to be reflected in exchange rates.