Too Early For Yuan to Replace U.S. Dollar

There has been a lot of speculation concerning the goal and strategy of China concerning the place of the yuan or renminbi on the world economic stage.

I have no doubt the Chinese have a goal of becoming the leading reserve currency in the world, but if that ends up being a reality, it's going to be many years from now.

The idea that China is attempting to bypass the existing currency market and working to build an alternative to it is actually the exact opposite of what it really wants to do, which is to become a larger player in the current global economy.

For now, the yuan isn't close to being ready to be a currency leader, as China needs to take a number of steps before it's going to be considered a means of paying for major transactions on a global basis.

China's first step will be to push to be accepted as a reserve currency at the International Monetary Fund. In October the IMF will convene to review, among other things, whether or not to include the yuan in Special Drawing Rights group of reserve currencies. This review only occurs twice over a 10-year period, so it's important for China to get this done; which I think it is likely to accomplish.

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Bank of America (NYSE:BAC) Says Renminbi at Fair Value

Contrary to the assertions from some politicians and academics in America, Bank of America's (NYSE:BAC) T.J. Bond, chief Asia economist at Bank of America, said he sees the renminbi at "close to fair value."

Bond said, “We don’t agree with what academics and politicians in the United States are saying, that the renminbi is significantly undervalued.”

The renminbi is just another name for the yuan, the Chinese currency.

“For the first time in many years, we actually think Asian currencies are roughly fairly valued,” Bond added. “Given the strength of the story: strong growth, rising inflation, we think Asian currencies will continue to appreciate, but as they’ve reached fair values, we don’t actually expect much appreciation against the U.S. dollar.”

That assessment could be wrong based on the additional $600 million in so-called quantitative easing being implemented by the Federal Reserve, which will continue to debase the U.S. dollar

Gold Standard Should be Considered Again Says World Bank President

In what can only be a nod toward the true weakness to the global economy, World Bank president Robert Zoellick said major economies should considered reinstating a form of the gold standard again.

In an editorial in the Financial Times, Zoellick said countries should look at floating currencies, with gold used s a means of measuring the exchange rates.

Zoellick said what he's thinking is the new system would "likely to need to involve the dollar, the euro, the yen, the pound and (a Chinese yuan) that moves toward internationalization and then an open capital account.

"The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."

As expected, there wasn't a positive response to the idea from those responsible for policy, as it would undermine their ability to spend in any way they choose to, which has led to the economic global crisis we face today.

In other words, a true gold standard would force austerity and politicians to spend within certain parameters. That would mean they can't buy votes from the clueless electorate who don't understand what's going on.

All honest people are acknowledging the problem as described by Zoellick, but aren't willing to take the steps needed to curb the out of control spending the socialist leaders and countries have been participating in for decades, and which has finally caught up with them.

As Margaret Thatcher said in the past, the problem with socialism is you eventually run out of other people's money. That time has happened, and just lowering spending to deal with the current circumstances isn't near enough to take care of it. A band-aide will never do.

Competing currencies and a gold, and possibly other precious metal standard, which could include silver or other metals, would go a long way toward dealing with politicians that continue to break into the future piggy bank of our children and grandchildren, which we no longer are able to afford.

Freeport-McMoRan (NYSE:FCX) Surges on Yuan News

Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX), along with a number of raw materials companies has been rising in price today as hopes the appreciation of the yuan against the U.S. dollar will help commodity companies going forward, after the announcement the Chinese will float their currency more against the greenback.

Shares of Freeport stood at $68.96, gaining $3.06, or 4.64%, as of 1:25 PM EDT.

One major problem many haven't considered yet, is the yuan, or renminbi, isn't assured of appreciating, and all the hand clapping and backslapping may be premature if the Chinese currency depreciates in value instead, which wouldn't be a stretch to consider at all.

Either way, the market is assuming the yuan will appreciate, and mining companies and commodity producers are benefiting from that assumption at this time.

No matter what happens though, it'll unfold over a period of time and not in the short term, which will be more sustainable whichever way things go.

China, U.S. Currency War Escalating

China shot off its own response to the aggressive comments by some American politicians and business leaders over the alleged idea that they are manipulating their currency to their own advantage.

With political pressure in the U.S. mounting, this could turn into an unpleasant and unprofitable dispute for both countries, with the U.S. having the most to lose.

Some business groups claim the yuan is undervalued as high as 40 percent, although that's largely conjecture and not able to be proved.

Even so, the Chinese currency is almost surely undervalued to some degree, and could rise some if allowed to by the Chinese authorities.

But the problem is the way America is dealing with the situation, where populist-leaning lawmakers from America are making a lot of noise in order to get noticed by their constituents regarding looking like they're doing something about the problem.

With China holding so much U.S. debt and being in the much stronger position from that point of view, it doesn't make much sense to do the public saber-rattling which can sometimes lead to stupid decisions because of not being willing to back down.

China asserts its global trade surplus will probably drop to a trade deficit in March, after plunging by 50 percent in January and February.