Yuan Falls to Lowest Level Since November as China Permits Declines

China’s onshore yuan dropped to its weakest level since November, signaling that policymakers are gradually allowing the currency to decline against a resilient US dollar. The yuan fell to as low as 7.2487 per dollar as the People’s Bank of China (PBOC) gradually reduced its daily reference rate for the managed currency, reaching a level not seen in four months. This move coincided with a strengthening of the greenback, driven by market expectations that the Federal Reserve is not close to initiating a rate-cut cycle.

The PBOC is navigating a complex balancing act, attempting to weaken the yuan at a pace that supports economic growth without triggering market panic or capital outflows. Throughout the year, the central bank has maintained a steady yuan, but pressures have mounted due to worsening capital outflows and sluggish domestic growth.According to Ken Cheung, chief Asian FX strategist at Mizuho Bank, the PBOC may permit further yuan depreciation. The central bank appears to be focusing on managing the pace of yuan depreciation rather than defending a specific level, particularly in the context of a prolonged high-rate environment in the US.

The yuan’s struggles are not unique in Asia. Japan’s currency recently hit its lowest level against the pound since 2008, and currencies such as the Thai baht and Indonesian rupiah are nearing multi-year lows. These Asian currencies are under pressure due to their wide yield discount compared to the US, which benefits the dollar. This rate gap is further intensified by expectations that the Federal Reserve will not cut rates soon, given the surprisingly resilient US growth and persistent inflation.

Christopher Wong, a strategist at Oversea-Chinese Banking Corp., noted that the higher dollar-yuan rate aligns with broader dollar movements as US yields resumed their upward trend. He added that the yuan is likely to weaken further due to the still-wide rate differentials with the US and the anticipation of more US-China trade frictions.

In summary, the yuan’s recent decline reflects broader regional currency struggles amid a robust dollar and high US interest rates. The PBOC’s careful management of the yuan’s depreciation is aimed at balancing economic support with market stability, a challenge complicated by external economic pressures and domestic growth concerns. As the situation evolves, the market will closely watch the PBOC’s actions and their impact on the broader economic landscape.