Over the weekend, China announced that it would be dropping the yuan peg to the dollar. Oh they've been under pressure from the G-20 to do this for quite some time. However, I believe that they are doing it for a couple of reasons:

1. They need another tool to fight the growing inflation problem that they have right now in China. A higher yuan exchange rate to the dollar (and even euro) would help that.

2. They are coming out of being an emerging/export dependent nation to being a developing/consumer-led nation. Therefore they need a stronger yuan to give them better purchasing power.

So who does this help and hurt?

It will hurt the greenback some in the near term because the yuan would be going up against it. However, it would help other Asian exporting nations because it would allow them to raise the value of their currencies and not hurt their competitiveness in their export industries. Also, those that do a lot of business with China could benefit from a higher yuan exchange rate such as Australia.

So the Asian currencies like the yen, Singapore dollar, Hong Kong dollar, etc. will benefit over time and the Australian dollar will likely benefit over the "long haul" because they have a stronger yuan to purchase the commodities that they need from Australia.

also, its been rumored that China is in the market to buy more gold. If so, a stronger yuan would go a long ways towards helping to buy up more gold. So you could see the yellow metal benefit over time from this "higher yuan" too.

Sean Hyman
Editor, the Currency Cross Trader
www.worldcurrencywatch.com