Money & Business
Money Watch: China's Currency Move Won't Float All Boats
Make no mistake: China didn't do all Americans a favor by agreeing to revalue its currency. For some time, U.S. officials have pleaded with the Chinese to allow the yuan to float more freely rather than pegging it so strictly to the dollar. That's because the weak dollar has made Chinese goods sold abroad that much more attractive, putting a crimp on U.S. exports. Last week, China finally complied, raising the value of the yuan versus the dollar and then agreeing to unhitch it from the greenback, linking it instead to a basket of foreign currencies. "China's full implementation of its new currency regime will be a significant contribution toward global financial stability," said U.S. Treasury Secretary John Snow. But even though U.S. manufacturers may have gotten what they wanted, many segments of the U.S. economy don't necessarily win. For starters, though China revalued earlier than expected, it did not go as far as some had hoped. China allowed the yuan to strengthen by about 2 percent against the dollar. Ashraf Laidi, chief currency analyst with MG Financial Group, was "expecting China to revalue later in the year by as much as 3 to 5 percent." For U.S. consumers, the fact that Chinese goods sold here will now be more expensive means inflation will remain a cause of concern. For U.S. companies that buy parts and services from China (whose red-hot economy grew by 9.5 percent in the second quarter compared with a year earlier), costs could rise and profit margins shrink. This is particularly true of retailers and technology firms, says Sam Stovall, chief investment strategist for Standard & Poor's. For U.S. homeowners, it could mean a temporary end to record-low mortgage interest rates. After all, if the Chinese stop buying as many U.S. dollars to support their currency, they're likely to purchase fewer treasury bonds, which means bond yields should rise. Last week, the yield on the 10-year treasury note jumped from 4.18 percent before the announcement to 4.28 percent. And finally, for U.S. critics of Chinese attempts to purchase American companies, this could be trouble. If the Chinese currency strengthens, so too does the ability of Chinese investors to buy publicly traded U.S. firms, just as China's state-owned oil giant CNOOC is trying to buy California-based Unocal.
Money Watch: You've Got (Totally Unsolicited) Mail
American consumers are doing a better job managing certain aspects of their massive credit card debt. Card delinquencies are down, for instance, and fewer folks are responding to those annoying offers in the mail. So what are card companies doing in response? They're stuffing even more offers into our mailboxes. According to the research firm Synovate, card issuers mailed out a record 1.4 billion offers in the first quarter, putting them on track to send out nearly 6 billion solicitations this year.
The Week Ahead: Homely Prices
Bubble or not, the residential real-estate market is playing an ever larger role in the health of the domestic economy. Since 2001, 2 out of every 5 jobs created in the private sector have been tied to the real-estate boom, according to Merrill Lynch economist David Rosenberg. What's more, 70 percent of the rise in household net worth in recent years can be attributed to gains in home values. No wonder economists fret about the health of the housing market. This week, the National Association of Realtors and the Commerce Department will release data on June home sales. Though existing home prices have been steadily rising, prices on new homes have quietly started to drop. The median sales price on a new house in May was $217,000, down from $232,000 in April and $237,000 in February. If price tags continue to fall, it could be cause for concern on both Wall Street and Main Street.
The Week Ahead: Party On, GDP
By some estimates, high oil prices are shaving three quarters of a percentage point off gross domestic product . Yet somehow, the economy is finding a way to grow. In fact, economists now think GDP rose a healthy 3.5 percent in the second quarter.
Resilient Economy
Gross domestic product
(Year-over-year change)
1st quarter 2003 1.9 pct.
2nd quarter 2005 3.5 pct.*
[labels]
0 2 4 6 8 pct.
1st quarter 2003
1st quarter 2004
2nd quarter 2005
*Estimate
Sources: Bureau of Economic Analysis, Reuters
Chart by USN&WR
This story appears in the August 1, 2005 print edition of U.S. News & World Report.