The offshore exchange rate of China’s fiat currency versus the U.S. dollar recently breached the 7:1 mark for the first time in over two years, after it touched a new 2022 low of 7.0188 yuan for every dollar on September 15. Similar to other global currencies that have depreciated in 2022, the yuan’s decline is being driven by the strengthening of the U.S. dollar.
The Yuan’s Depreciation
After trading at 7.0288 on September 15, 2022, the offshore rate for the Chinese currency against the U.S. dollars broke the $7 mark per dollar threshold. The exchange rate between the currencies has been at this level for the first time since September 15, 2022, which is more than two years ago. The yuan’s onshore exchange rate was not affected by the threshold of 7:1.
According to a report in the Economic Times, the yuan’s depreciation against the greenback comes against the backdrop of a strengthening dollar. The currency’s decline also came amidst growing fears that the Chinese economy may be slowing down.
However, as per the report, the Chinese central bank’s attempts to assist the economy via an interest rate cut in August helped to spark a 3% depreciation of the yuan.
Remarking on the dilemma that the People’s Bank of China (PBOC) now faces, Ken Cheung, chief Asian FX strategist at Mizuho Bank, said:
The PBOC has defended the RMB currency rate against any possible breakup [the]7 handles will be available in a matter of minutes, and any rate reduction would contradict this objective.
Cheung is also quoted in another report stating that he now believes that the PBOC is no longer interested in stopping the currency from breaching 7 yuan for every dollar, but will attempt to “delay and smooth out the yuan depreciation pace.”
Economic Daily reports that not only is the yuan in trouble with the stronger dollar, but also other currencies. The report also states that authorities in Japan worry about the stronger dollar. Since January 2, 2022 the exchange rate has moved from 115 to 1 to 143 to 1. September 20 22nd 2022 saw the change.
Just the like yen, European Union’s single currency — the euro — began the year trading around €0.88 for every dollar but by August 21, 2022, it reached parity with the greenback. Other currencies, with the exception of the Russian ruble and the Zambian kwacha, have not been able to compete against the dollar.
Some economists believe the U.S. Federal Reserve’s attempts to bring down the United States inflation rate via regular marginal increases in interest rates could be one of the reasons why the dollar has gained against other currencies.
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