China Moves Closer to Becoming Currency King: Riccardo Barbieri

When U.S. President Barack Obama told Chinese Premier Wen Jiabao last week that the yuan’s peg to the dollar is unsustainable, he forgot to add one thing: It also threatens the world’s floating exchange-rate system.

China’s official currency reserves are simply becoming too large. The Bank for International Settlements’ triennial survey of foreign-exchange and derivatives activity, released this month, points to huge and growing trading volumes in the global currency market. But make no mistake: China and other trade surplus countries have accumulated reserves even faster in recent years. If this trend continues, China may soon set trading ranges for major currencies such as the U.S. dollar and the euro, effectively ending their free float in the market.