Despite China’s economy being on course to become the biggest in the world, the USD/CNY pair is usually not counted as a major currency pair. This may be due to the fact that it is not traded as much as some of the majors.
The USD/CNY pair showcases the value of the US dollar against the Chinese Yuan Renminbi. It tells us exactly how many CNY it takes to purchase one USD.
By far the most traded currency in the world, the USD has imposed itself as the world’s top reserve currency too. What this means is that it is the preferred currency of foreign governments in which to keep their foreign reserves.
The USD is the main medium of exchange in oil trading. This fact has earned it the nickname “petro-dollar”.
In addition to the United States, 12 other countries use the USD as their currency. Some of the more surprising entries on this list are Zimbabwe, Ecuador and Panama.
Due to its international standing, more USD is held outside the United States than within.
The central bank behind the USD is the Federal Reserve. Interestingly, the Fed is a private company rather than a branch of the US Government.
Up until 1971, the USD was pegged to gold. The last such peg had the value of one ounce of gold set to $42.22.
After the Nixon Shock ended the convertibility of the USD to gold, the currency was allowed to float freely.
As a result of this move, and of other economic and fiscal factors, the USD went through a slight but steady process of depreciation. Over time, this process “ate up” most of the value of the greenback. Such was this process of gradual erosion of value that nowadays one would need over $600 to reproduce the buying power of $100 1971 dollars.
The Yuan Renminbi is the currency of the People’s Republic of China. Sometimes referred to as the “redback” the CNY is powered by one of the world’s top economies.
Its value is often subject to manipulation by the Government however.
Renminbi means the “people’s currency”. Yuan means “round” and it denotes the basic unit of the people’s money.
Up until 2005, the CNY was pegged to the USD. The policy of turning the Chinese economy into a market one brought about increased foreign trade. With it, the need surfaced to increase the competitiveness of the industry. The most straightforward way of accomplishing these objectives was through the devaluation of the currency.
Thus, the USD peg has been abandoned. Following several rounds of currency devaluations, one USD is now worth a little over CNY 7.
The correlation of the USD and CNY is nowhere more obvious than in the arena of exports.
China’s economic miracle has been fuelled by massive exports since the 1980s. It is no secret that the primary destination of these exports is the US.