The rise of the US dollar continues to reverberate through global financial markets and crossed a significant threshold against the Chinese currency on Thursday.

That said, analysts and traders said the move that saw the US dollar move above 7 yuan against the dollar for the first time in more than two years remained relatively orderly this time around in a move which is more about the generalized strength of the US currency. .

Indeed, the CFETS RMB Index, which measures the Chinese renminbi against a basket of currencies, “remains flat and well below early-year highs, suggesting that, overall, the RMB (renminbi) is not really weakening that much.” here with this USD (US dollar) movement,” Brad Bechtel, global head of foreign exchange at Jefferies, said in a note. The renminbi is the name of the Chinese currency; the yuan is a unit of currency.

“Again, it is the USD and not the RMB that is at issue,” he wrote.

The US dollar was trading at 7.009 Chinese yuan in USDCNH offshore trades,
-0.06%
after hitting 7.0183 yuan and rising above level 7 since July 2020, when the global economy was initially reeling from the COVID-19 pandemic. In onshore trading, the USDCNY dollar,
+0.00%
recovered 6,995 yuan.

China’s central bank, the People’s Bank of China, or PBOC, closely manages the movements of the yuan in mainland or onshore trade. The PBOC sets a daily reference rate, or fixing, in the morning. The onshore yuan cannot move more than 2% above or below this course during the day.

To be sure, concerns about the Chinese economy as it continues to pursue widespread lockdowns under its zero COVID policy and deals with the aftermath of a housing bubble have certainly weighed on the yuan. The dollar, however, is tearing against all its main rivals, with the Federal Reserve on track to continue making giant interest rate hikes next week as policymakers affirm their commitment to fight against inflation, which continues to significantly exceed the target.

See: Why an epic US dollar rally could be a ‘wrecking ball’ for financial markets

The ICE US Dollar Index DXY,
-0.17%,
a measure of the currency against a basket of six rivals that does not include the yuan, hit a two-year high last week before falling back. It pushed back towards those highs this week after a warmer-than-expected August consumer price index reading bolstered expectations that the Fed would offer a rate hike of 75 basis points, or 0. .75 percentage points next week, with some analysts calling on policymakers to raise rates by a full percentage point.

The rising dollar has put pressure on oil, gold and other commodities listed in the unit, while being seen as a headwind for US multinationals and a threat to emerging and developing economies with a high proportion of debt denominated in dollars.

Lily: A rising US dollar is already sending ‘danger signals’, economists warn

The Chinese central bank, meanwhile, has taken steps to curb the fall of the yuan. Last week, the People’s Bank of China, or PBOC, reduced the amount of foreign currency holdings that banks must hold as reserves in order to support the yuan.

Analysts credited the measures with keeping the yuan’s decline from spiraling out of control.

“The PBoC’s defensive tactics towards the exchange rate — in an effort to keep the depreciation orderly — have actually worked. Without these tactics, credit spreads, recent trade-related developments and the likely net flow of capital would likely have led to a speculative mini-race in RMB,” said Stephen Gallo and Greg Andreson, FX Strategists at BMO Capital Markets. , in a footnote.

Instead, the market saw an “orderly break” from the 7.00 level, they wrote. While the risk of an “awful” turn in exchange rate movements is not zero, the PBOC is poised to remain on the defensive, the analyst said, noting that the aggressive policy stance of the Fed means the US Dollar is “putting the most pressure on currencies where there is no official pullback against USD strength.

The European Central Bank showed ‘backsliding’ through monetary policy, raising rates by 75 basis points last week, analysts wrote, while Japanese officials ‘showed backsliding through verbal intervention’ “.

EURUSD euro,
+0.11%
traded up 0.2% against the US dollar at $0.9992, after trading at levels last seen in late 2002 as the prospect of an energy crisis weighed on stocks. outlook for the euro area economy.

The dollar traded near 145 Japanese yen, its highest level since 1998, before falling back on Wednesday after reports said the Bank of Japan was seen checking rates in the foreign exchange market, a decision seen as a threat of intervention. The dollar was up 0.3% at 143.54 yen on Thursday afternoon.

Hear Ray Dalio at the Best New Ideas in Money Festival on September 21-22 in New York City. The hedge fund pioneer has a strong opinion on the direction the economy is taking.

About The Author

Related Posts