Dollar Index Up, Onshore RMB 4-Month Low

As December dawned, the first working day unveiled a significant downturn in the Chinese yuan, both onshore and offshore, as it dropped over 300 points. The financial landscape saw the onshore yuan closing at 7.2706 against the US dollar, marking a decrease of 374 points from the previous trading day, the lowest since July 24. Meanwhile, the offshore yuan briefly peaked at 7.2896, concluding the day down by 414 points compared to the prior session.

Market analysts, including Xiao Yu, an associate researcher at the Institute of Asia-Pacific and Global Strategy under the Chinese Academy of Social Sciences, pinpointed the robust performance of the US dollar as the chief influencer on the yuan’s depreciation. Indeed, the past month has seen the dollar index ascend significantly, breaching the 106 mark on November 14 and reaching a peak of 107.6893 on November 22.

Commentary from Nanhua Futures indicates a likely scenario where the strength of the dollar may not be sustained for long. They infer that unless a systemic risk emerges in the domestic economy, the yuan may not experience any significant upward trend in its exchange rate against the dollar in the near term, despite a potential for manageable upward pressure.

Adding depth to the discussion, the chief economist team at Minsheng Bank advised examining the longer cycle of the dollar index, which seems to be in a significant upward phase without signs of reversal just yet. They pointed out that 2025's market might continue to oscillate between inflationary circumstances and recession expectations, thereby engendering continued fluctuations in the dollar index.

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Moreover, Xiao stated that currency conversion and trade policies are currently pivotal in influencing the yuan’s trajectory. He highlighted recent statements by Donald Trump regarding trade tariffs, suggesting they have reignited fears of escalating trade wars that are now reflected in the currency exchanges. Trump has indicated on social media that he plans to impose a 10% tariff on all Chinese imports.

This anticipated tariff hike poses a notable threat to domestic exporters. Xiao elaborated, stating that Trump's recent comments heightened awareness that the forthcoming tariffs could be more severe than past instances, raising concerns among businesses that rely heavily on exports.

Research from CICC emphasizes that the market's risk appetite this December could still be swayed by fluctuations in the perception of Trump's trade policies. It stands out that many of these impacts have already been apparent throughout November, hinting that support for the dollar might diminish by December's end.

While Minsheng Bank's economists acknowledge potential immediate support for the dollar from Trump’s policies, they stress that over the medium to long term, fundamental economic indicators, primarily the Federal Reserve’s interest rate trajectory, will significantly govern the dollar's performance.

The Federal Reserve's latest monetary policy minutes illuminate their belief that if inflation trends towards the set target of 2% while maintaining a robust labor market, a gradual shift towards a more neutral policy stance will be appropriate. This suggestion signals a potential deceleration in interest rate reductions, prompting speculation about the dollar's future movements.

CICC's analysis postulates that if the Fed continues its rate cuts in December while hinting at a prolonged path of reduction towards neutral rates, the dollar may experience some corrections at its current highs. However, if the Federal Reserve opts to halt the rate cuts in December, it could foster a new upward phase for the dollar. Noteworthy is the upcoming Central Economic Work Conference in December, expected to outline economic goals and policy frameworks for the coming year, making it essential to monitor this event closely. A recovery in economic expectations could alleviate some of the downward pressure on the yuan's exchange rate.

In a prior statement, Liu Ye, head of the International Department at the People's Bank of China, emphasized the stability of China's international balance of payments and the maturity of its foreign exchange market participants. He remarked on the growing rationality in trading behaviors and the market's enhanced resilience. Liu noted that recent policy initiatives have measurably improved market expectations, thereby strengthening the economy’s recovery momentum and stabilizing the yuan’s rate.

Liu also cautioned that various factors such as global economic divergences, geopolitical shifts, and fluctuations in international financial markets could contribute to a dual-directional movement trend in the yuan's exchange rate in the future. This highlights the importance of vigilant monitoring of both domestic policies and global economic environments affecting the yuan’s value.