Stocks Extend Gains As China Eases Currency Policy

Heard On 'Morning Edition'

Stocks extended their winning streak Monday after China said it would allow its currency to appreciate against the dollar, a move that could provide a boost for U.S. manufacturers and exporters.

The Dow Jones industrial average rose for a fifth day, adding 108 points in morning trading. Broader indexes also climbed.

China keeps its currency, the yuan, artificially low to bolster exports. At the same time, the weak currency makes imported goods expensive for consumers. A stronger yuan compared with the dollar should allow U.S. manufacturers and exporters to be more competitive selling their products in China, one of the world's largest and fastest-growing economies.

The stronger yuan also should reduce the threat of inflation in China, meaning the government won't likely have to raise interest rates soon. Investors in recent months have been somewhat concerned that China would take steps to restrain rapid growth in the country.

At the start of the year, China tried to slow the pace of growth by forcing banks to hold larger reserves. The moves were aimed at avoiding speculative bubbles in areas like real estate.

Saturday's announcement about the yuan was timed to keep China's leaders out of the hot seat at the G20 summit in Toronto next weekend, said Patrick Chovanec, a professor of business at the Tsinghua University School of Economics and Management in Beijing.

"By taking this action now — in words right now; hopefully in deeds later — they take that off the front burner of the G20, and there's a chance that the G20 can have a more productive meeting," he said.

But Shen Minggao, Citibank's Hong Kong- based chief economist for the Greater China region, predicted that the yuan will make minimal gains this year.

"Our forecast is that, by the end of the year, the Chinese currency could gain about 2 percent over the dollar. So it's a gradual process," he said. "And the reason I think we don't see any movement today is that the government is still cautious about the economy and also about the weak euro."

The policy shift didn't impress China's critics in Congress much. New York Democratic Sen. Charles Schumer said he would press ahead with legislation to levy tariffs against Chinese exports.

Tsinghua University's Chovanec said Beijing's move will give most lawmakers a bit more wiggle room.

"Members of Congress are going home to run for re-election, and they want to have a story to tell," he said. "And until Saturday evening, they had no story to tell. They basically said, we put the pressure on China and China didn't do anything."

The focus on China comes on a quiet day for domestic news. The Federal Reserve begins a two-day meeting Tuesday where it is expected to keep benchmark interest rates at historic lows. That could keep a lid on any spike in interest rates, which often climb to match the higher rates set by the Fed.

In the first hour of trading Monday, the Dow rose 107.85, or 1 percent, to 10,558.49. The Standard & Poor's 500 index rose 10.68, or 1 percent, to 1,128.19, and the Nasdaq composite index rose 22.42, or 1 percent, to 2,332.22.

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