The exchange rate of China’s fiat currency against the U.S. dollar recently crossed the 7:1 mark for the first time in more than two years, after hitting a new 2022 low of 7.0188 yuan to the dollar on September 15. Like other global currencies that depreciated in 2022, the yuan’s decline is being fueled by the strengthening U.S. dollar.
The depreciation of the yuan
The exchange rate of the Chinese currency against the U.S. dollar has crossed the seven RMB for every dollar mark after trading at 7.0188 on September 15, 2022. This is the first time in more than two years that the exchange rate of the two currencies has crossed this threshold. However, on the same day, the yuan exchange rate had not crossed the 7 to 1 threshold.
According to an article in the Economic TimesThe depreciation of the yuan against the greenback is taking place against a background of a strengthening dollar. The currency’s decline is also taking place against a background of growing fears of a slowdown in the Chinese economy.
However, according to the article, the Chinese central bank’s attempts to support the economy with an interest rate cut in August helped trigger a 3% depreciation of the yuan.
Regarding the dilemma now facing the People’s Bank of China (PBOC), Ken Cheung, chief Asian currency strategist at Mizuho Bank, said:
The PBOC has demonstrated its willingness to defend the RMB exchange rate so that it does not cross the 10% mark. [les] 7 soon and a reduction in the rate would contradict this objective.
Cheung is also quoted in another Bloomberg article indicating that he now believes the PBOC is no longer interested in keeping the currency from crossing the 7 yuan per dollar mark, but will try to “delay and smooth the pace of yuan depreciation“.
The flight of the dollar
The Economic Daily article notes that the yuan is not the only currency struggling against the rising dollar. According to the article, Japanese authorities are also wary of the strengthening dollar, which has seen the exchange rate between the two currencies rise from 115:1 on January 2, 2022 to over 143:1 on September 20, 2022.
Like the yen, the euro began the year trading around €0.88 for every dollar, but on August 21, 2022, it reached parity with the greenback. With the exception of a few currencies such as the Zambian Kwacha and the Russian Ruble, many other currencies have struggled against the dollar.
Some economists believe that the U.S. Federal Reserve’s attempts to bring down the rate of inflation in the U.S. via regular marginal increases in interest rates may be one of the reasons why the dollar has gained ground against other currencies.