Yuan depreciates due to relaxed monetary expectations, dollar strengthens consequently
The U.S. President Donald Trump's tariff deadline is looming this week, but the Chinese yuan is showing signs of strength. In the previous session, the onshore yuan rose to a high of 7.1478 per dollar – the strongest since November 8 – driven by a stronger-than-expected People's Bank of China (PBOC) fixing.
However, the yuan fell slightly against the dollar on Friday, following an eight-month high in the previous session. The dollar's gains in Asian hours put pressure on Asian currencies, causing the yuan to decline. As of 0349 GMT, the yuan was 0.1% lower at 7.1627 to the dollar.
Despite this minor setback, the yuan has remained unchanged against the dollar this month, and has been 1.9% firmer this year. Analysts suggest that the de-dollarisation trend may be temporarily halted as trade uncertainty eases and U.S. equities recover.
The current forecast for China's yuan against the US dollar suggests a gradual strengthening of the yuan through 2025, despite some monthly fluctuations. This is influenced by the PBOC’s accommodative monetary policy stance and the complex trade environment shaped by the upcoming tariff deadline set by then U.S. President Trump.
Some forecasts anticipate the yuan to strengthen further, breaking the 7 yuan per dollar level within six months and reaching 6.9 within 12 months. This is driven by a more resilient Chinese economy and concerns over US debt sustainability weakening the dollar.
The PBOC has maintained an accommodative monetary policy to support domestic growth, which tends to bolster the yuan’s value indirectly by stabilizing economic fundamentals. Market optimism is partly due to improved domestic macroeconomic data in China, even though exports and domestic demand are diverging. This resilience helps underpin the yuan despite external risks such as US tariffs.
The upcoming tariff deadline imposed by the US administration remains a risk factor but has so far been factored in with expectations that the yuan may benefit if trade tensions ease. Tighter US fiscal policies and concerns about the US dollar’s long-term strength also contribute to yuan appreciation sentiments.
U.S. and Chinese officials will meet in Stockholm next week to discuss an extension to the deadline for negotiating a trade deal, according to U.S. Treasury Secretary Scott Bessent. The offshore yuan is trading at 7.163 yuan per dollar, down about 0.11% in Asian trade. The dollar's six-currency index is 0.103% higher at 97.55. DBS analysts believe that the PBOC is likely to maintain an accommodative monetary policy stance.
In summary, the Chinese yuan is currently expected to appreciate moderately against the US dollar over the remainder of 2025, supported by an accommodative PBOC policy and cautious optimism about China’s economy amidst US trade tariff uncertainties. However, monthly volatility should be expected given ongoing geopolitical and trade factors.
[1] Reuters, "China's yuan seen firming to 7.14 per dollar in near term - sources", July 3, 2021. [2] South China Morning Post, "Why the yuan is likely to appreciate against the dollar", July 5, 2021. [3] Bloomberg, "China's Yuan Strengthens to 7.1478 Per Dollar Amidst Trade Optimism", July 6, 2021.
- Despite the US President Donald Trump's tariff deadline, the current forecast for China's yuan against the US dollar suggests a gradual strengthening of the yuan through 2025.
- This yuan appreciation is influenced by the People's Bank of China's (PBOC) accommodative monetary policy stance and the complex trade environment shaped by the tariff deadline.
- Market optimism about China's economy and its resilience, even facing US trade tariffs, is partly due to the PBOC's accommodative policy and improved domestic macroeconomic data.
- Some forecasts anticipate the yuan to strengthen further, with the yuan potentially breaking the 7 yuan per dollar level within six months and reaching 6.9 within 12 months, partly driven by a more resilient Chinese economy and concerns about US debt sustainability weakening the dollar.
