Recently China announced a change in its currency policy. No longer will the Yuan be pegged exclusively to the US dollar. Rather the Chinese currency will float within a narrow band against a basket of world currencies.

The financial talking heads have been chattering endlessly about what this means and how to define the basket of currencies. They (perhaps) are looking at the trees and not the forest.

The likely outcome of this change may well be a slowing of the relentless purchase of US Treasuries by China’s Central Bank. Currently they recycle surplus US dollars (currently almost $800 billion total) resulting from our structural trade imbalance (due to our insatiable appetite for the lower cost goods they produce).

While this change will undoubtedly be only at the margin its impact may well be magnified by the actions of others (see hedge funds). The net result of this change could be higher US interest rates.

Higher rates may cause the US economy to slow.

If it happens this way it may be the beginning of the end for the overheated housing boom.

Three Questions To Ask Your Financial Advisor:

1. Am I earning 3.7% in my money market fund?

2. Is there a commission (trailing commission, also called a 12-b-1 fee) in my money market fund?

3. Is it right to pay extra fees in a money market fund?

Financial markets bounced back in the second quarter of 2005 with most asset classes posting modestly positive returns. Reversing the negative returns of a dismal first quarter, bonds rebounded to positive returns for the year to date. Equities also posted positive returns in the period but still remained slightly under water for the year through June 30, 2005. Cash (money market funds) improved to a current yield of almost three percent and remains one of the better returning asset classes thus far in 2005.

What can we expect looking ahead?

» Read More