Quite simply, the massive hoard of dollars which countries such as China are accumulating from their trade surpluses with the U.S. is not fully lent back to the U.S. (as BoP capital account flows). A part of it or even a sizable part appears to be flowing into Euro-denominated assets. This is also contributing to the major upward thrust to the Euro in foreign exchange matters. This is what is meant when Euro zone authorities say that the common currency is now carrying a disproportionate burden of adjusting for the pegged yuan also.
Information flow from China is scanty. But the Reserve Bank of India has pointed out that valuation changes (from holding non-dollar assets in the forex reserves) account for 20 per cent of the increase (of around $ 17 billion) in India's forex reserves in the past year. It is quite likely Indian forex reserves management strategy now somewhat resembles China's.
The bottomline: not only is the Chinese peg hurting America, it is also becoming a major headache for the Euro zone, particularly Germany. The peg, though, may not be dismantled any time soon. In such a situation, given the magnitude of trade and investment flows emanating from China, one can reasonably expect the U.S. dollar to continue to remain weak against the Euro for some more time to come.
