China's Currency Slide: No Cause for Concern ... Yet

Bob Johnson: This week's chart focuses on the Chinese yuan versus the U.S. dollar. Looking way back to 2005, the export economy in China was booming, and some of its neighbors and trading partners were becoming very upset at what was viewed as an undervalued currency by many, many experts.

Since then, over a broad period of time, the Chinese currency has appreciated about 34%, a relatively dramatic change. In fact, [this climb] prompted the IMF to say that the yuan is no longer officially an undervalued currency. Of course, just as that happened, the Chinese did decide to devalue their currency slightly a couple of weeks ago. But that change is just a drop in the bucket compared with the 34% appreciation that we've had since 2005. And, in fact, we really won't become terribly concerned about the move in the Chinese currency unless we have four or five moves like that, which I'm not currently anticipating.

The Chinese government hopes the recent move to devalue their currency will aid exports and limit imports. These effects will be small. More importantly, they are hoping to convince monetary authorities that they are letting the market play a much greater role in setting currency rates, paving the way for their inclusion as a reserve currency--a club currently dominated by the U.S. dollar, the euro, and the Japanese yen.