The Effects of China's Yuan Revaluation

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China's official announcement of their plan to reevaluate their yuan to eventually break its peg to the US Dollar has caused a ripple effect in global markets. US treasuries declined, and other major currencies rose against the US dollar. The chart above displays today's market decline in the S&P 500, as US companies react negatively to higher cost of Chinese goods.

The decision comes just after US Treasury Secretary Tim Geithner pressed China to allow their currency to naturally appreciate, thus allowing the US dollar to appear more attractive. The yuan revaluation benefits China as it gives them more purchasing power. China leads the export recovery, which provided enough reason for the Australian and New Zealand dollars to rally in response.

The US will benefit in one way from the yuan revaluation in trade. A weaker US dollar in the long run is likely to boost our exports. However, the dollar's demise has returned as major currencies rallied against the greenback. US consumers will eventually end up paying more for Chinese made goods, but don't mistake this for inflation - it's simply a trade balance.

Gold will rally as China shifts their holdings of US dollars. Most importantly, this shift has cause a decline in US Treasuries. China will not buy as much Treasuries as it did before to maintain the yuan's peg to the dollar.

Keep in mind that the yuan revaluation will be gradual, so there is still possibility that this news will subside and European debt concern will come back into play. Many economists say this is a risky move for the US as the cost of Chinese imports will rise. The Chinese realize the benefits for them, they are not so much concerned for the US. The announcement was bound to happen as the Chinese have long voiced concerns for the crumbling US economy.

Chinese industrial companies and commodities will benefit from this gradual revaluation, and demand will pick up from China. This should come as no surprise to those who are already invested in the China demand craze. Dantes Outlook was already prepared; the yuan appreciation just fuels the return on investment.

The big drag in the DOW today were those companies that rely on cheap imports from China.