China’s currency dropped further in May against the dollar than in any other month since the Chinese government began allowing the renminbi to appreciate gradually in the summer of 2005, in a currency market shift that could help Chinese exports but worsen trade friction with Europe and particularly the United States.

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China may have another motive in allowing the renminbi to decline against the dollar in the past month: the dollar’s strength. The euro has been sliding against the dollar this spring, and because the renminbi is effectively linked to the dollar, the euro has also been very weak this spring against the renminbi.

This has hurt the competitiveness of Chinese exports to Europe — and China exports slightly more to Europe than to the United States. Even with the renminbi’s decline against the dollar in May, the renminbi still rose 5.5 percent against the euro during the month.

via China Lets Currency Weaken, Risking New Trade Tensions – NYTimes.com.