"China Says It Will No Longer Peg Its Currency to the U.S. Dollar"

From the NYTimes (link):

Following months of political pressure, China today revalued the yuan to 8.11 for every dollar, scrapping a decade-long peg to the currency in favor of a more flexible band using a "basket of currencies."

China's announcement, which has been anticipated and debated by economists and government leaders for months, is the first time in a decade that China has raised the value of its currency, also known as the renminbi, effectively making the yuan and exports more expensive against the United States dollar.

The move represents China's first step toward the more flexible exchange rate that the United States, Europe and many other countries have called for in recently. Until the announcement, the yuan sold for 8.27 for every dollar.

But the change falls far short of the 10 percent to 15 percent revaluation demanded by many in Washington, where the Bush Administration and Congressional leaders have been calling for a higher yuan, in part to alleviate America's growing trade deficit with China.

Now let's watch that current account deficit shrink away to nothing (sarcasm intended)!

Update: A better analysis than mine from Mark Gongloff's WSJ Afternoon Report:

After years of resistance, China finally changed its currency policy -- not enough to make a difference right away, but possibly a harbinger of bigger changes to come.

For more than a decade, Beijing has kept its yuan artificially low against the U.S. dollar. U.S. politicians have long complained that this keeps Chinese exports unfairly cheap, hurting U.S. exporters and widening America's trade gap. Many economists are skeptical about how big of a deal this really is. But some, including Alan Greenspan, have suggested China should revalue anyway, to discourage foreign investment and keep inflation in check. Beijing has insisted it would revalue when it was good and ready. Apparently, it's ready; China said it would let the yuan float against a basket of unspecified currencies, cutting it loose from the dollar. To give it a higher starting point for its new life, China also upgraded the value of the yuan by 2.1%. China said the yuan will be allowed to move no more than 0.3% higher or lower on any day, but analysts weren't sure what that meant. If China keeps this tether tight, constricting the yuan to a narrow band, then the impact will be minimal. But if China lets the currency appreciate by 0.3% every day, that could add up quickly. "If it were daily, then China could allow the yuan to rise by this maximum 0.3% every day until we could see a 6% [gain] in a month and 30% after 5 months," Ashraf Laidi, chief currency analyst at MG Financial Group, said in a note. It's still not clear which approach China will take, and Beijing officials have said they fear a quick yuan appreciation could hurt their economy.

But China's move could have echo effects. Malaysia immediately cut its dollar peg, and other Asian nations could soon follow suit. The move could fuel speculation of more upgrades, keeping hot money pouring into China, fueling inflation and forcing still more upgrades. In the worst case, if the U.S. dollar weakened quickly against the yuan, then U.S. Treasury bond prices would fall as Asian economies unloaded their holdings, pushing interest rates higher. "The net result of the U.S. consuming far more goods or services than it produces is that the Chinese … are a de facto player in setting our interest rate policy and impacting our economy," Barry Ritholtz, chief market strategist at the Maxim Group, said in a note. "