A front page article in this morning’s WSJ talks about the Chinese government considering what to do about their currency and its current peg to the dollar.
Another article by Steve Liesman in the same WSJ talks about the foreign demand for US Treasurys being a primary factor in keeping US interest rates low. Foreign governments, especially Asian, have more dollars than they know what to do with so they buy US treasurys and recycle them into our economy.
What happens if China re-pegs its currency, effectively increasing the costs of its goods in dollar terms, reducing its need to recycle so many dollars? Demand weakens for US treasurys and interest rates have to go up to entice other borrowers into the mix. Feels pretty ugly.