China's currency weakened slightly, despite tough talk by U.S. officials on Beijing's foreign exchange policy. Some financial analysts expect a round of market intervention by Asian central banks to keep their currencies from rising.
The Chinese central bank set a new high exchange rate for the yuan against the dollar Friday, a day after U.S. lawmakers and Treasury Secretary Timothy Geithner sharpened criticism of its foreign exchange policy.
Even so, the yuan weakened slightly against the dollar.
The yuan is about 1 percent stronger than it was in June, when Beijing eased its strict peg to the dollar. Most of the gain came this month, ahead of U.S. congressional hearings on China's exchange rate policy.
Thio Chin Loo is an Asian currency strategist at BNP Paribas in Singapore. Despite the slide Friday, Thio thinks Beijing will let the yuan strengthen further.
"It might slow from the pace we had this week but directionally, yes, it's still heading up," said Thio.
But Geithner says this managed appreciation is too slow. China only allows the yuan to move half a percent daily.
"China is running a set of policies designed to keep the currency undervalued. They are moving to let it rise but not that very quickly. Not very much either. The impact of that has the effect of providing a relative disadvantage to products that compete with products the Chinese make," he said.
Some U.S. lawmakers call for punitive measures against China, the United States' second largest trading partner, such as higher tariffs on its exports. Many economists and business people around the world say the yuan is undervalued by as much as 30 percent.
With elections in November, political analysts say there is pressure on Congress for a tougher stance partly to allay concerns about the weak U.S. economy. Artificially cheap Chinese exports have been blamed for record U.S. trade deficits, which have allowed Beijing to accumulate hundreds of billions of U.S. dollars in reserves.
But China resists pressure to let the yuan appreciate.
Foreign Ministry spokeswoman Jiang Yu said Thursday the yuan's exchange rate is not the answer to U.S. trade deficits and unemployment.
Here in Asia, the yuan's exchange rate causes problems for China's export competitors. Strong capital inflows, including Chinese investments, are pushing up the value of many Asian currencies.
On Wednesday, the Japanese central bank bought dollars to weaken the yen, which had reached 15-year highs against the dollar. The move came after China aggressively bought Japanese government bonds, helping lift the yen's value.
China also has bought record amounts of South Korean government debt, pushing the won up 3 percent against the dollar this month.
Mark Walton is a senior economist at the investment bank CLSA Asia Pacific Markets in Hong Kong. He says as Asia braces for a slower global economy next year, central banks, including those in Taiwan and South Korea, will try to keep currencies from strengthening.
"They would be as active in the currency market as they have ever been," he said.
If they do, China analyst Gordon Chang says it would compound the challenge for the U.S.
"What I'm really afraid is that because of China's fixing the value of their currency, the Japanese are doing the same, other Asian nations are going to do the same and it's not inconceivable that we could see the end of the free-floating exchange rates. The next trade war could be over currencies," said Chang.
Despite Tokyo's intervention this week, the yen held steady Friday around 85.80 to the dollar. The government has indicated it might buy dollars again if the yen continues to strengthen.
Japanese Prime Minister Naoto Kan and President Obama are expected to discuss the yen when they meet next week (September 23) in New York.