A senior official of the People’s Bank of China last week argued that China should let the yuan appreciate to blunt the impact of rising raw materials prices on the domestic inflation rate, as I reported Monday.

The Chinese currency climbed to a three-year high against the US dollar, just above the 6.4 yuan/dollar mark.

Is the yuan strengthening, or is the dollar weakening? For the time being, it looks like dollar weakness. China’s monetary authorities have kept the yuan fairly stable against a basket of currencies of China’s major trading partners, and the yuan/dollar rate has tracked the euro/dollar rate fairly closely up through Monday’s trading session.

China is likely to respond to inflation with a greater sense of urgency than Europe.

Germany’s Bundesbank, usually quite hawkish, last week predicted that the country’s inflation rate would jump to 4% a year as a result of special factors arising from the pandemic reopening, and expressed confidence that the impact would be transitory.

China appears far less tolerant. Its regulators have tried to jawbone commodity prices downward, warning against speculation and hoarding.

The jawbone campaign against commodity prices won’t help much. Commodity buyers, to be sure, increase inventories in the face of a rising price trend, hoping to pay less now rather than more later. Discouraging manufacturers from buying iron and copper won’t affect the overall supply-demand balance, however.

It’s likely that China will allow the RMB to appreciate against the dollar as well as against the Euro and yen, sacrificing some market share in exports in order to suppress inflation at home.

The RMB appreciation of the past year mainly reflected dollar weakness. But China’s anti-inflation campaign is likely to produce a prolonged period of yuan strength.