Everyone is talking about the possibility of China raising interest rates. What if they did? How could it impact currencies?

In October, the PBoC surprised everyone by raising interest rates for the first time since 2007. At that time, we said the central bank rarely makes one off changes and we believe that the central bank will raise interest rates again before the end of the year. On the day that the PBoC raised rates (which was October 19), all of the major currencies including the Japanese Yen fell sharply against the U.S. dollar. This suggests that if the Chinese central bank were to raise rates again, it could exacerbate the flight to safety into U.S. dollars.

However interestingly enough, the move in USD/JPY was mild compared to the move in other currencies. Safe haven flows into U.S. dollars overshadowed demand for Yen - Japan leans more heavily on China than the U.S.

Therefore if China were to raise rates again, the U.S. dollar should be the biggest beneficiary.

Kathy Lien is Director of Currency Research at GFT, and runs KathyLien.com.