China donates currency to G20
The timing of China's exchange rate move is hardly accidental. The Chinese have said they will "increase the flexibility" of the exchange rate "to benefit the domestic economy".
But in the very short term, it is in Toronto where the benefits will most clearly be felt.
A few months ago, the battle over the exchange rate threatened to blow up this week's G20 Summit in Canada. The US Treasury Secretary, Tim Geithner, took the first step towards defusing the issue, with his decision in April to delay a politically charged report to Congress which would have labelled China a "currency manipulator".
With this statement just days before the Summit, China have now rewarded his patience. As usual, the wording is vague. It doesn't even mention the dollar. But the assumption must be that China plans to move back to the policy of allowing its exchange rate to appreciate in real terms against the dollar.
Between July 2005 and March 2008, the yuan appreciated 18% in real terms against the greenback. But then Beijing got spooked by the collapse in global exports, and re-instated a rigid peg.
As I've discussed in the past (see my post from Davos earlier in the year), a rising yuan won't get rid of China's structural excess of savings over investment - so, by extension, it won't get rid of its massive current account surplus with the US.
Also, as far as the Chinese are concerned, the weakening Euro has already pushed up the trade-weighted value of the yuan significantly. The rise against the dollar in the months ahead may be slower than many Congressmen would like.
Thanks to the recession, China's current account surplus has gone from 11.3% of GDP in 2007 to 5.8% in 2009. The country even had a trade deficit at the start of this year, for the first time since 2004. The question is what happens next.
Tim Geithner - and others in the administration - fear that the surplus will go back up as the global recovery gathers pace. Or, at the very least, not fall any further.
That's a problem, if you're looking for external engines to drive US growth - so it doesn't have to rely on a massive budget deficit for many more years to come.
The exchange rate is only a means to the end of more balanced growth. And as we saw from President Obama's recent letter to the G20 leaders, published in the Washington Post, the US is worried that the widespread swing toward fiscal austerity could put that balanced future at risk.
As I mentioned in an essay for the Today programme on Saturday, when Chancellor George Osborne announces a faster programme of deficit cuts in the Budget on Tuesday, he won't be the first finance minister from a major European country to do so - he's almost the last. Italy, Spain, Portugal and Germany have all unveiled new austerity plans in just the past few weeks.
For some, this is all good news. For them, Keynes might have been the man for 2009, when the biggest risk was another great depression. But now, they say, that risk has gone away: and a mountain of government borrowing has taken its place. If we don't want a government debt crisis to replace the crisis in the financial system, ministers need to show they can get a grip. Everyone can agree that they don't want to be another Greece.
But there are others who say that governments have been too quick to change course - especially in countries like Germany, which are not borrowing anything like as much as the UK. The worriers say the G20 is spending too much time second-guessing the markets, when the risk of another depression has not really past.
After all, the recovery - on both sides of the Atlantic - is still fragile. Lending to business is weak. Investors are still willing to lend to most governments at very low rates. And prices are falling in Ireland and Spain.
True, China, Brazil and other emerging economies are taking off again. But in the industrial countries, they say there's still a question whether the private sector can grow under its own steam.
These doubters include Martin Wolf, the FT commentator whom Mr Osborne tapped this week for his commission on bank reform. Paul Krugman shares his fears - and, as we are seeing, so does the US president. It will be interesting to see what they can agree to say on this subject in Toronto.
In the debate over government borrowing, the world has moved a long way in the past few months - and it has moved in Mr Osborne's direction. The only question is whether the global economy has moved as far.