The Chinese reduced the value of their currency this week in relation to the US Dollar, which should have repercussions in both markets. Kaja Whitehouse tells you what this means for both the US and China.
China on Wednesday devalued its yuan currency for a second day running. It could have an effect on American consumers and investors. Here's how.
If you like your goods made in China, a weakened yuan is your friend. When the yuan falls in value, goods imported to the USA from China become cheaper. And China makes a lot of things from cars and computers to clothing and furniture. Conversely, American businesses will find it more expensive to sell their goods to China.
The Federal Reserve is poised to raise extraordinarily low interest rates as employment returns to healthier levels. But a stronger dollar against the yuan could depress inflation because Chinese goods are cheaper. That, in turn, could lead the Fed to hold off on upping rates this fall because it already is worried about inflation being too low. Those with mortgages rates explicitly tied to base rate moves would benefit. Savers looking for more interest — not as much.
Many U.S. companies do a considerable amount of their business abroad, either selling directly to Chinese consumers, manufacturing or via overseas units that produce income in the local currency. Apple, for example, relies on China to make its iPhone and iPad. A stronger dollar compared to the yuan means any income generated in China loses value as it is repatriated back to America. Similarly, manufacturing for U.S. firms becomes more expensive. All this could lead to lower earnings for U.S. companies. And when earnings dry up, so do jobs.
China, the world's second largest economy, consumes a lot of oil, second only to the U.S. However, oil prices are denominated in dollars, so a gutted yuan means China's purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products. That reduction in demand could lower prices, an upside for American drivers.
Investors have worried for some time about China's slowing growth and what this might mean for global markets. As the yuan slid this week, so have stock prices. Of particular concern for consumer investors is what is perceived to be Beijing's apparent preference for surprise interventions in currency markets.