2011 could well be one of the most fruitful years for the dollar.
From the early 1990s to 2010, the Chinese government has been having a great field trip keeping the Chinese yuan well below how the market values it, giving artificial force by using the Chinese yuan to buy against the US dollar. This manipulation by the Chinese government forces the yuan to fall against major currencies such as the US dollar. While such intervention is well within international law, the Obama administration must now consider an eye for an eye in adopting the reverse method against the Chinese government.
Of course, this is not a forex game, it is really about fighting for survival. Whoever gets a lower currency gets a more positive trade balance. We expect 2011 to be the year that the US dollar slides significantly to allow the US economy to recover. Furthermore, we expect 2011 to be the year that the Obama administration gives specific instructions to buy Chinese government bonds, so we expect the value of Chinese bonds to rise as well.
Another reason why 2011 would be interesting for the US dollar would be the signing of free trade agreements with ASEAN countries. One way to counteract the impact of the devaluation of the Chinese yuan on America’s trade deficits is to minimize trade with China in the first place. Having a free trade agreement (FTA) with ASEAN would mean fewer imports from China, thus negating China’s rise against the United States. Countries like Indonesia and Malaysia are very capable of producing and selling raw materials to the United States, countries like Singapore and Thailand offering good quality assembled mechanical and electronic components.
When the FTA with ASEAN is signed, this could indicate a real shift towards the amount of the exchange rate between the yuan, US dollar and ASEAN currencies (such as Malaysian ringgit, Singapore dollar, Thai baht) . Furthermore, we forecast that the US dollar would likely trade against the Chinese yuan at US $ 1 = 6.50 yuan in early 2011. Therefore, one of the key milestones that could change the balance of the currency would be this FTA, that China would be interested in to warn.