Impact of China on the Value of US Dollar

This document discusses the impact of China on the value of the US dollar and its implications for the world economy. It provides case study answers and strategies for managing currency fluctuations. The document also explores the role of politicians and the potential rise of the Chinese yuan as a global currency.

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Case Study Answers
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5/22/2019

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Answer-1
China continuously affects the value of US dollar by pegging the values of its own currency.
The central bank of chine uses the modified exchange rate in setting the value of its currency
that is different from floating exchange rate, which is follow by other countries of the word.
The central bank of Chine ‘People’s Bank of Chine’ is responsible for influencing the value
of other currency by pegging its own currency ‘Yuan’. The main reason behind pegging the
value of ‘Yuan’ is to control the export prices, which is normally China is doing from USA in
a large trade volume. Pegging the value of RMB will reduce the prices of American products
in China while the Chinese products will be costly in the USA (Onyusheva, Naing, and Zaw,
2019). The Value of Yuan (RMB) is continuously pegging by the country to gain the benefit
in word and economic trades. The currency power of China is also comes from its exports
volume that country does with USA. In other words, it can be said that China is in currency
war with USA and trying the impact the value of US dollars by pegging its own currency.
China is the second largest economy in the world after USA and its economy also affects the
value of US dollars in several ways. The other issues are that Chinese exports are too costly
for those countries, which are not connected with US dollars. The Chinese companies also
accept the dollars in return to its exports goods to the USA. Further, they deposit it in the
central bank of the country and it will further increase the foreign reserve exchange of China.
China holds a huge amount of USA dollars in their foreign reserve that enables it to influence
the currency of USA. Because, after stocking the dollars in the country China can reduce its
supply in the market for trades, which further adversely affect the value of Dollar and
lowering the values of RMB (Shi and Li, 2017).
Answer-2
The vast swing in the value of US currency is a problem for the Multinational companies to
manage their businesses. To mitigate the risk of over fluctuation in the price of US dollars the
Multinational companies should make a strong plan to reduce their dependency on dollars.
For example, P&G and McDonald’s are two major giants of USA that operates their business
worldwide and almost dependent on dollars. The decrease in value of US currency may leads
to huge loss for these types of giants in the world economy. Reduce the dependency on dollar
and accept the other currency for trades is one of the most important strategies for the MNC
companies. Apart from this, those companies who face such type of situation may adopt the

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hedging strategy that protects the company from over fluctuation of currency. The
multinational company can reduce the impact of over fluctuation by buying a spot contract
with the bankers. Spot contracts help the company to fix the exchange rate against
fluctuations. However, the company might not be benefitted from the positive swings in
dollars but it will not hurt by negative swing as well (Subacchi, 2018).
Answer-3
The politician talking about the decreasing value of USA dollars because it not only
beneficial for the world economy, it also provides a balance between the world trades among
various countries. US dollar is an international currency, which is almost accepted by all
countries in the world for their export and import. The positive view of politician about the
decreasing value of dollar is related to purchasing power internationally. A lower value of
dollar enables other countries to import the products on low prices and eventually leads to the
consumer level. For example, decrease in value of dollars leads to higher cost of oil import
for the countries and it will also raise the price of oil in international market. It means those
countries who deals in US dollars can buy less quantity of oil and gas because a dollar can
buy less quantity of oil and gases after decrease in its value. Hence, the decreasing value of
dollar provides opportunities to other countries to raise their imports and it will also reduce
their dependence on US dollars (Abdoh, et. al., 20016).
The high value of dollar has hurt the manufacturing sector in the USA. Especially, the high
value of dollar reduces the employment opportunities, affects the profit, and investment in
manufacturing sectors. However, it is also known that USA is a large exporter of the
manufacturing products in the world that determines the economy of other countries as well.
In such a scenario, decreasing in the value of dollar will not only raise its own manufacturing
sectors that controls the world rather it provides opportunities for other countries to develop,
rise, and grow with their own strong value of currency (Wildau and Mitchell, 2016).
Answer-4
USA dollar is one of the strongest currencies in the world and it is almost used by all nations.
However, the rise of China in world economy somewhat influence the values of USA dollars.
As China is rising every day and pegging its currency, the USA might have also control its

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value of dollars to control the impact of Yuan on dollar. However, it might be possible that
China will allow for free floating of RMB in the world economy, which will not affect the
value of US Dollar. However, USA faces strong currency war with China because of bulk
trade between these two countries. USA imports huge quantity products and services from
China and China take advantages of it. Although, if the values of USA dollar will be decrease
in future, it will be better for world economy as their dependency will be reduce on US
currency. However, it can also be said that dependence of world economy on dollar shows a
strong faith in US governance policy while in contrary it shows that there is absence of
alternative currency (Sulistyowati and Ahmadi, 2018). If China is growing with this speed
and its export expansion strategy will be successful, then it can be said that Chinese RMB
will replace the status of Dollar in future. However, currently one Yuan is almost equal to
0.14 US dollar and if China will continuously peg its currency in future, it can be said that
Yuan will be the new currency power in the world economy that has replaced the US dollar.
One of the key notice is that the US consumption rate is increasing in last few years and so it
dependency on imported goods and services. It leads to flow of dollar in other countries,
which further affects the US economy and will provide opportunities for other countries to
rise against the Dollar in future (Marcos, 2018).

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References
Abdoh, W.M.Y.M., Yusuf, N.H.M., Zulkifli, S.A.M., Bulot, N. and Ibrahim, N.J., (2016)
Macroeconomic Factors That Influence Exchange Rate Fluctuation in ASEAN
Countries. International Academic Research Journal of Social Science, 2(1), pp.89-94.
Marcos, A. (2018) Is the Dollar’s hegemonIc role In the InternatIonal monetary system
sustaInable? [online]. Available from:
http://rabida.uhu.es/dspace/bitstream/handle/10272/15349/Is_the_dollars.pdf?sequence=2
[Accessed: 22/05/2019].
Onyusheva, I., Naing, C.T. and Zaw, A.L. (2019) The US-China trade war: cause-effect
analysis. The euraseans: journal on global socio-economic dynamics, 11(4), pp. 07-15.
Shi, C. and Li, J., (2017) Does dollar-pegging matter? A closer look at US trade deficits with
China and Germany. The Journal of International Trade & Economic Development, 26(4),
pp.451-472.
Subacchi, P. (2018) China’s Weak currency conundrum. The International Economy, 32(3),
pp.40-41.
Sulistyowati, L.N. and Ahmadi, H. (2018) Macro Economy, Fluctuation of Rupiah Exchange
Rate on American Dollars at The Time and Before Jokowi Government. Ekuilibrium: Jurnal
Ilmiah Bidang Ilmu Ekonomi, 13(2), pp.151-162.
Wildau, G. and Mitchell, T. (2016) China: Renminbi stalls on road to being a global
currency. Financial Times, 11.