Here’s What the Shanghai Accord Means for the Dollar

The Shanghai Accord in its simplest form is a weaker dollar, a weaker dollar for imported inflation, a weaker dollar to stimulate U. S. exports (as noted previously here). It was a way for China to cheapen their currency without breaking the peg to the dollar.
You would cheapen the dollar, and then China would keep the peg, and the Chinese yuan would cheapen along with it. That framework came out at the end of February, and it was a very good guide for policy from February through June or July.
The problem is, and this is really important to understand, all of these processes are dynamic, and a lot of them are in conflict. In other words, the central banks want things that conflict with each other.
For example, the Federal Reserve (Fed) wants inflation. They say so. It’s not a secret. One of the ways to get inflation is a cheaper currency, but they also want to raise rates. Which is why they have to raise rates, so they can cut them in the next recession.
Raising rates makes the dollar stronger. How do you reconcile a weaker dollar, which imports inflation, with a stronger dollar, which creates deflation? You can’t. They’re completely opposite goals, but this is where the approach diverges.

This post was published at Wall Street Examiner on October 20, 2016.