The European Union and China are now on a collision course, as the European Central Bank and the People’s Bank of China struggle to contain the rise in oil prices.
The dollar has dropped more than 70% against the Australian dollar and is now trading at less than US$1.20, with the euro trading near the bottom.
It is not yet clear how much the Fed and the Chinese are prepared to tolerate.
In its latest policy statement, the ECB said that the bank’s quantitative easing policy had “led to a rapid decline in the value of the euro” and the currency had lost $2.4 trillion of value since its inception.
The ECB is concerned that the US dollar will continue to rise, and that it will become more of a currency of last resort, with many countries relying on the US as their main trading partner.
It also warned that a rise in the price of the dollar will push up inflation, as consumers will seek to buy goods and services abroad at the highest possible prices.
In response to the Fed’s move, China is urging the central bank to use its printing power to counter the US move and is calling on the European Union to do the same.
The Chinese government is also looking to boost growth.
In the coming months, China has also been trying to convince the US to open up its market for US-made cars, a policy which would further damage the value and competitiveness of the US-based auto industry.
The global economy is on the brink of an unprecedented economic meltdown and it is unlikely that it can recover, writes Andrew Leigh.
Chinese President Xi Jinping and German Chancellor Angela Merkel have been pushing for China to be allowed to reopen its markets to foreign trade, a move that has also triggered a fight between the EU and the US.
China is also increasingly concerned that it might be able to use the dollar as a currency reserve against the EU, which is the only currency with which it has been able to successfully trade goods and finance its military, according to a senior European official.
The Chinese are also preparing to announce an unprecedented policy shift, according the German government, which has been pushing to open markets to their domestic market, in response to President Xi’s push to open them to trade with the US and other countries.
The move would make it possible for China, the world’s second-largest economy, to provide its citizens with an alternative to US-dominated markets.
China has been using the dollar, a symbol of the American dollar, as a hedge against the US economic sanctions imposed on it by the US Congress.
It argues that the dollar is “uncompetitive, too volatile and prone to manipulation”.
It has also used it as a means to raise funds and to influence other countries around the world, such as India, Brazil and Russia.
Analysts have long speculated that China’s policy of opening its markets will become the new global standard in a series of policy moves that will undermine the US economy, as it tries to secure its influence in the world economy.
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