What's going on?

The Chinese yuan fell the most versus the US dollar last week since its big devaluation in August. And that decline will most likely continue: on Friday China announced that the yuan would be more closely tied to a �basket� of currencies rather than just the US dollar (as it has been for two decades).

What does this mean?

Usually, the strength of a country�s economy determines the value of its currency: a strong economy should lead to a strong currency. But China�s currency was directly linked to the value of the US dollar. That was great for China when its economy was booming because the yuan didn�t go up in value. And its low currency made it even easier for China to sell goods abroad and, therefore, for its economy to keep growing. But now that China�s economy is slowing - and the US dollar is booming - China wants to �de-link� the yuan from the dollar so that the yuan drops in value. The drop would boost economic growth in China. (Currencies are complicated. The Khan Academy provides a good intro to �yuan pegging�)

Why should I care?

The bigger picture: So why is China buying up its own currency then? Last week, we highlighted that China is spending a lot of money protecting the value of the yuan. That sounds counterintuitive. If China wants the yuan to go down in value, why is it propping up its value? Because if it didn�t, the value of the yuan would collapse far too quickly � and the resulting mayhem could be very damaging to China�s economy. So China is trying to allow its currency to fall gradually. For the markets: This can create a headwind for other economies, especially the US. For example, a stronger US dollar versus the yuan makes it harder for American companies like Caterpillar to sell goods into China (because those goods become more expensive). Also, a lower yuan makes it more likely that international companies will make things in China rather than more expensive places, like Europe or the US.