Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
I certainly agree that China's propping up the dollar, and how they go about doing that, has an affect on the dollar-euro and dollar-other exchange rates. (I think the affect is unlikely to be very large, however, but I haven't really looked at enough to say for sure, so I admit I could be wrong on that.) I did not mean to imply otherwise. However, that's a US Treasury  problem, not China's problem.  For China what matters is how its own currency and international buying power are changed by its exchange rate policies -- the gross and distributional welfare/development effects of favoring exports over imports or vice-versa.

The fact that China has the option to switch how it manages it's exchange rate policies -- and always has -- leads to the question of why they are choosing to track the US dollar so tightly right now. I think the most reasonable place to start is the political-economy equilibrium view: the current policy of pegging to the dollar best balances the current internal and external demands on government policy for the welfare of various interest groups.  This means that moving away from that peg -- as US exporters and domestic industry wants -- needs to be understood as a set of conditions requiring a shift in the demands of Chinese interests (only one of which is its relationship with the US and others) on China's government.  

China is pegging the dollar because it is in its best interests to do so, and it will change as soon as it is in its best interests to do otherwise.

by santiago on Sat Nov 7th, 2009 at 12:19:00 PM EST
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