Como se combate o populismo? "Com eleições", responde Fukuyama

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Dollar's recent rally suggests yuan revaluation may finally happen.

Is the dollar rally for real?
Commentary: Moves signal yuan may finally move

By Dr. Irwin Kellner, MarketWatch
Last Update: 12:01 AM ET May 17, 2005

HEMPSTEAD, N.Y. (MarketWatch) -- Does the dollar's recent rebound in the foreign exchange markets signify a reversal of its long-term downtrend or is this just a dead cat bounce?

Following last year's slide, virtually no one was expecting big things from the greenback this year. After all, the United States was running a humongous trade deficit, and the traditional remedy for this is a weaker currency.

A punier unit makes imports more expensive and exports cheaper. Eventually, this is supposed to reduce the red ink on trade.

Guess what? The dollar stopped falling at the end of last year -- even though our trade deficit has continued to widen. It's been climbing, on balance, ever since.

At the end of last week, the dollar was back to its highest levels against the major currencies in at least six months. Even more important, it closed above its 55-week moving average for the first time in three years -- a key resistance level, according to the Wall Street Journal.

On the surface, there appear to be several economic reasons for the buck's bounce.

March's trade deficit unexpectedly narrowed, while in April, there were strong gains in both jobs and in retail sales.

The markets now expect that the increase in the first quarter's gross domestic product will be revised upward by as much as a half point. Meanwhile, growth is much weaker in Europe.

Let us not forget interest rates. While long-term rates have been moving lower, the Fed has boosted short-term rates eight times since the middle of last year and the markets expect more to come.

Higher rates in the States combined with lower rates across the Pond make the buck look more attractive -- at least compared with the euro. As well it should, since the euro and its European brethren had risen so much against the dollar, they became seriously overvalued.

Indeed, this misalignment of the currencies is precisely the reason why economic conditions are so much brighter in the U.S. than they are in Europe. These countries are having trouble selling their goods in the U.S. because they are too expensive.

But the key reason for the buck's bounce is the persistent and growing speculation that China will revalue its yuan.

China has long tied its currency to the dollar at a very low level. This has given its exporters a significant advantage, causing our bilateral trade gap to widen so much it affected our overall totals.

Since it could not fall against the yuan to correct our trade deficit with China, the dollar fell where it could -- against the euro, the British pound and others. If and when the yuan is allowed to float upward, it will take some of the pressure off these other currencies.

It could well be that traders are positioning the world's key currencies for just such a development.