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In the US pressure is mounting on the Obama administration to demand that China allow appreciation of the RMB (or as it is also known, the Yuan) and end a policy that gives Chinese exports an unfair advantage in international markets. Democratic Senate members have begun to draft legislation and are convening hearings on the RMB’s effect on US trade. This move is certain to further sour relations between the US and China, their second largest trading partner after Canada.

While the legislation would not single out China by name it would require the US Treasury Department to determine if any nation has a currency misaligned with the dollar. The current law requires a finding of currency manipulation. The Treasury declined to make such a finding in April of last year even though it stated at that time that the RMB was undervalued.

Last Friday the Chinese premier Wen Jaibao rejected calls for an end to the currency link, saying he doesn’t “think the Renembi is undervalued”. This is in sharp contrast to opinion within the US where economists feel his stance is hampering global economic recovery. The Nobel Prize winning economist Paul Krugman of Princeton University said last week that global economic growth would be 1.5% higher if China allowed the value of its currency to float freely on the international foreign exchange market.

Since joining the international forex market, the RMB has historically been pegged to the US Dollar. It appreciated throughout the 1970’s until it reached a level of 1.50 Yuan per USD in 1980. As China’s economy began to open in the early 1980’s the Yuan was devalued to improve the competitiveness of Chinese exports. In 2005 the peg was officially lifted and there was a one off revaluation of the RMB to 8.11 per USD. Since then the value of the RMB has been maintained in a tight band of approximately 0.5% around central parity within a basket of foreign currencies including chiefly the US Dollar, the Euro and The Japanese Yen. It has been trading at close to 6.83 against the US Dollar since mid 2008. Beijing has long stated that it will not allow the Yuan to trade freely until its domestic economy is strong enough to pick up any resulting decline in exports.

Last month the Organization for Economic Co-Operation and Development (OECD) said that more exchange rate flexibility would help economic stability in China. Its report also said that the Chinese economy was coping with the global economic crisis “remarkably well”. China’s economy grew by 8.7% in 2009, setting it on course to become the world’s second largest, with Japan in third place. While the US economy remains the largest OECD estimates that the Chinese economy may overtake it to become the world’s largest producer of manufactured goods in the next five to seven years.

At present it would appear that China is remaining resolute and that any changes in the value of the Yuan on the international forex online market will come about only as the result of an internal policy shift rather than as a result of external pressure.

Even as the Greek Parliament pledged to rein in its out of control budget deficit, briefly easing the anxiety over its detrimental  financial problem, Forex online traders across the globe weighed the risks — and potential rewards — posed by the mounting debts of certain European governments.

While investors welcomed news that Athens would raise taxes and cut spending by $6.5 billion this year, economists  warned that this move might be too late, and may not even be enough to avert a bailout for Greece or to contain the crisis shaking Europe and its common single currency, the Euro.

According to analysts, the Euro’s 4.6% decline against the Dollar this year has been a “panic selling” stemming directly from Greece’s financial crisis. However, even if Athens’s “austerity” plan is enough to save the country, at least for the time being and provide some security for the Euro, is Greece just the type of the iceberg? Will Spain follow Greece into the depth of debt? Or will it be Italy? Or Portugal? Which country will be the next domino to fall?

Portugal, Italy, Ireland, Greece and Spain, collectively known as PIIGS, have been clumped together as the problematic children of the EU, as each is saddled with massive debt loads and weak economies that threaten the very strength and survival of the single European currency. One might ask why are all of these countries suddenly facing problems now? Why all at once?

Go back about 12 years; before the Euro Zone was created and a single currency was put in place, these countries (Spain, Italy, Portugal and Greece) had relatively high interest-and-inflation rates. However, with the establishment of the Euro, these countries were all tied to a relatively low interest rate, single monetary policy, and one currency.

Gone with the wind were the days when these countries could simply devalue their currency to pay off their debt.  These countries have been steadily burying themselves under mountain upon mountain of debt; the recent recession was just the catalyst event that made all these countries problems visible to the outside world.

One of the most problematic countries after Greece is Portugal.  A large budget and trade deficit combined with a shortage of domestic savings has left Portugal completely dependent on foreign investors. And, like Greece, its socialist governed is hesitant to cut the out-of-proportion spending. 

However, while Greece seems to be taking its financial problems seriously, Portugal on the other hand, is not. While last week, the Portuguese government announced a long-term budget austerity plan encompasses spending cuts via reducing tax breaks and containing public sector wages, the plan contained no “substantial” Greek-style wage cuts or tax hikes.

The Italian government is also heavily indebted — it has more than $2 trillion in total exposure. However despite this, it is in a slightly stronger position than some of its fellow PIIGS countries, as its budget deficit is equal to only 5.4% of its GDP and its economy is expected to grow by 0.9% this year.

That’s in sharp contrast to Ireland, which had been a source of anxiety last year. New austerity measures, including a government hiring freeze and public sector wage cuts, have put it in a stronger position as it raises 19 billion Euros this year.

However, the most troublesome country after Greece, some analysts say, is Spain, which has been buried in a deep recession. Its economy, the euro zone’s fourth largest, is five times the size of Greece’s, and almost twice the size of those of other financially struggling countries — Greece, Ireland and Portugal — combined Facing an unemployment rate of 20%, a budget gap of more than 10% of GDP, and an economy expected to contract by 0.4% this year.

But ask Spain’s Prime Minster, José Luis Rodríguez what he plans do about the country’s fiscal deficit problem, and he first promises to extend his country’s retirement age, and then says he won’t.

He promises a public-sector wage freeze, but his Finance Minister, Elena Salgado, says he really doesn’t mean it. But somehow he will cut the deficit to 3% by 2013? But according to Spain’s deputy prime minister, Maria Teresa Fernandez de la Vega, “the government has a plan”…

This year alone, analyst predict that the Western European countries may need to raise more than half a trillion dollars in order to refinance existing debt and cover their overextended budget gaps.

Whatever the outcome is for Greece, a “debt crisis” plague has spread across the PIIGS of Europe – threatening the very political and financial balance across the Union. With Germany and France emerging as the clear rescuers, leaders in Berlin and Paris could very well end up holding all the cards – dictating the fiscal policies of Portugal, Ireland, Italy, Greece and Spain.