If China uses a stronger yuan to offset inflation pressure, this could also work as the spur for much broader weakness for the dollar. A stronger yuan should spill over into general strength for Asian currencies, and weakness for dollar/Asia as a whole should in turn impact on G10 dollar trade.
China's move to a more flexible currency has been very slow as the shift to a more freely floating yuan in effect means a stronger yuan, and China says its financial system and export led economy can only cope with gradual change.
However, there are signs a faster yuan rise could suit the authorities, and after several years of gradual adjustment and the development of yuan markets, the economy may be able to stand a more rapid yuan appreciation.
The authorities have the facilities to manage a more flexible currency and have allowed the yuan to appreciate by 3.8 percent since returning to a managed float in September.
In order to support a more flexible currency China's authorities have launched yuan option trading, and repurchase facilities, which are designed to aid yuan settlements.
There has also been great interest in recently launched yuan denominated corporate bonds, known as dim-sum bonds.
The Hong Kong Monetary Authority sees huge growth potential of foreign direct investment flows into China from yuan bond issuance, and thinks the pace of yuan convertibility may quicken if global demand for yuan trade grows.
Offshore yuan FX trading is seen doubling by year end, according to Deutsche bank.
Both China and Brazil recently voiced support for the yuan to play a greater global role, including in the International Monetary Fund's Special Drawing Rights. However that would necessitate a more freely floating currency.
Although a fully floating currency may be some way off, a quicker yuan rise may suit China's authorities, and is envisaged by Xing Yujing, a deputy director general of the People's Bank of China.
A stronger yuan would also gain China valuable political leverage with the United states, but perhaps most importantly will help offset the rise of domestic inflation.
Having already raised reserve requirements and interest rates several times, China's authorities may lean more heavily on a higher currency in order to combat inflation.
Where exporters are expected to lose competitiveness through a stronger yuan, the higher currency would cheapen China's massive imports of raw material and commodities.
Chinese imports rose a massive 51 percent in January, with buyers presumably taking advantage of a higher yuan and pre-empting expected rises in commodity prices.
On the other hand exports rose 37.7 percent in January, way above forecast, and that despite the yuan hitting record highs. As China appears to be coping with a stronger yuan, and is reaping the benefits of cheaper imports, there may well be a case to allow an even faster appreciation.
If so, the faster fall of USD/CNY should have a knock-on effect for Asia as a region. Other national central banks may well be happy to let their own currencies rise too. Most have inflation problems to deal with, and the major barrier to currency appreciation has been, more often than not, the need to compete with China. A higher CNY would lessen that need to compete.
Any broad slide in the dollar versus Asian currencies should in turn weigh on the dollar/majors. A weaker dollar will also necessitate a faster diversification of existing FX reserves in order to reduce potentially large losses that could arise from the massive build-up of dollars accumulated during widespread intervention campaigns across Asia.
It can be argued that faster rises of Asian currencies will negate for need for such frequent interventions. However, it is certain that any yuan gains, even faster ones, will be managed.
Other Asian central banks will also manage currency appreciation, and together with the need to adjust reserves to account for a falling dollar, the actual flow of dollars being exchanged for other currencies could actually pick up.
The return to a managed yuan peg in June 2010 has already coincided with the start of the current downtrend for the dollar index from levels just above 88.00.
Any signal from China that it is ready to allow sustained yuan gains, or more so, that its currency could be allowed to appreciate more quickly, look certain to drive the dollar down more quickly too.
The correlation between USD/CNY and the DXY index is fairly strong. The dollar index began a sharp fall in late 2005 after China dropped its currency peg.
That downtrend culminated at the start of 2008 when the yuan was pegged again due to the financial crisis, and the dollar subsequently began a two-year consolidation. The all time low for the index at 70.698 was seen just before the yuan was pegged again in early 2008 and seems to be the natural target of the current down-move, though a faster CNY rise could easily see the dollar through its prior low.