Right for the wrong reasons

A post on the (usually excellent and funny) BoingBoing blog caught my eye today. The post linked to a Christian Science Monitor article about the US dollar’s decline, and opined:

With the US dollar circling the drain in the wake of unchecked defecit spending by the irresponsible Bush administration, the world economy is being disrupted. In China, people with hard currency assets are converting them from dollars to Yuan, with enormous bank-queues of those who are selling US currency as fast as they can (Cuba’s gotten in on the act, trading its dollar assets for Yen and Euros).

Boingboing is right, but their examples are completely wrong. Read on to find out why.

Boingboing’s first example cites the CS Monitor article’s descriptions of people in China who are selling dollars and buying yuan. In fact, the article states (emphasis added):

Chinese citizens were lining up outside the Bank of China in downtown Shanghai last week to exchange US dollars for their own currency, the yuan, according to The Wall Street Journal. They fear an official revaluation of the yuan, which if it happens would cut into the value of their dollar savings. Sunday’s statement from the G-20 finance ministers called for more flexible exchange rates in Asia.

China’s exchange rate is pegged at 7.8 yuan to the US dollar – an artificially low rate, given its massive trade surplus. Normally, a country that exports as much as China would have huge demand for its currency (to pay the exporters), and this would push the price of the currency up. The currency peg in China prevents this from happening.
What people in China fear is that reality will catch up with the yuan exchange rate, and that the Chinese government will be forced to sharply revalue the yuan – increase its value, and thus decrease the value of US dollar savings. The demand to sell dollars in this case isn’t due to an American structural issue; it’s Chinese hedging against a possible sudden exchange-rate movement.
Secondly, Cuba.
Boingboing mentions that “Cuba’s gotten in on the act”, and links to an Associated Press article on the topic. Cuba has forbidden the use of the US dollar as hard currency in the country, and has imposed a 10% surcharge on any exchanges of dollars for Cuban pesos. The surcharge doesn’t apply when exchanging other currencies.
The Cuban peso is pegged 1:1 to the US dollar. If the value of a US dollar falls, the value of a Cuban peso will fall as well.
This is not Cuba’s attempt to dissuade its citizens from using dollars. Cuba’s efforts to encourage its citizens to convert US dollars to Cuban pesos are the Cuban government’s way of propping up its US dollar reserves, and this is not the only way they go about it. The AP article linked to by Boingboing has this down the bottom:

In another move aimed at capturing more foreign currency for government reserves, Cuban state companies last year stopped conducting business with each other in U.S. dollars. Any hard currency received from exports or sales had to then be sold to the central bank.

Boingboing’s conclusion about the US dollar is correct – the US deficits are causing questions about whether they will be able to continue funding these deficits, and if they can’t, the US dollar is very likely to depreciate. Their examples, however, are wrong, and do nothing to aid their argument.

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