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Thursday, July 21, 2005

A Brief History of Exchange Rates (via the Wall Street Journal)

China used to peg its currency to the U.S. dollar. It just announced that it will now let it float in a tight band against a basket of foreign currencies.

If you're not a finance person, you probably don't have much of an idea what I just wrote. The exchange rate is the rate at which on currency (like dollars) can be exchanged for another (like yen, or pounds). Here are a few articles that should give you enough background so that you'll get a sense as to why people make a big deal out of this.
A primer from investopedia that explains the basics of exchange rates: how they work, and why some exchange rates fluctuate and some don't

An article from the Wall Street Journal (subscription required) that goes through a brief history of exchange rates.
After the announcement of the change, the exchange rate on the yuan (China's currency) changed from 8.28 to the dollar to 8.11 to the dollar. Prior to the change in policy, the yuan/dollar exchange rate had been set by the Chinese government. Henceforth, it will be based more on market forces.

In simple terms, this means that (at least for the short term) a dollar will now buy less Chinese goods, or a yuan will now buy more American goods.

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