I think both China and the US will suffer in a stand off - but China may be willing to suffer some temporary pain for the prize - Taiwan.
I think a further and significant depreciation of the USD relative to other currencies will be inflationary and wont do the US economy much good - especially at this point in time.
The reason i say that is the US is 90% an internal economy and only 10% of its GDP ends up as exports.
certain international export orientated companies such as IBM, etc,, may benefit but the US internal economy(which is 90% of the economy) will suffer - inflation, balance of payments etc...
That's why the Fed is trying to resist dropping interest rates further - it may still need to, but it's trying to keep them on hold for the moment - doesnt want to the the USD continue to slide at the current rate.
The Fed is performing a fine balancing act and China can tip that balance significantly.
Taiwan is a major prize and a long term goal for China and if the US were to stand in its way the economic threat of devaluing the USD may be enough for China to achieve its goal.
China may be willing to suffer some short term pain - for a long term gain (Taiwan)- but can the US do likewise or will it buckle under this economic threat?
