China’s already fragile economic recovery from the pandemic faces a new challenge – a relentless recovery of the US dollar. The rise in the US dollar helps the yuan register its biggest gain in eight months on a trade-weighted basis in September, according to a Bloomberg replica of the official CFETS RMB index. The gauge that tracks the Chinese currency against 24 peers indicates that the others have weakened more against the dollar than the tightly managed yuan.
The rise of the yuan against its peers may hurt the competitiveness of Chinese products in global markets, according to HSBC Bank Plc, although export demand remains strong for now. This adds to the headwinds for the world’s second-largest economy which is already slowing due to a resurgence of Covid cases, an electricity crisis and regulatory restrictions.
“A higher dollar index will make the CFETS basket passively stronger and therefore hurt the competitiveness of China’s exports, as well as make yuan bonds less attractive from a currency perspective,” said Ju Wang, strategist. principal of foreign exchange at HSBC Holdings Plc. “Ultimately, the dollar-yuan rate will also have to rise a bit to reflect the global dollar trend.”
The Bloomberg Dollar Spot Index extended its rally this week to the highest since November, as U.S. Treasuries yields hit key levels across the curve after the Federal Reserve said it may start trading soon. reduce its bond purchases. As a result, most Asian currencies fell – the Thai baht was the worst performer of the month with a loss of 4.7%, followed by the Philippine peso which slipped 2.4%.
The yuan, however, barely budged against the greenback in both onshore and offshore markets, due to expectations that the People’s Bank of China would back the currency in the event of a sell-off. The need for Beijing to maintain market stability is even more pressing now amid lingering concerns about the debt of the China Evergrande group.
The Bloomberg basket syndicate CFETS rose in all but six sessions this month and climbed to 100.11 yesterday – the highest level since early 2016. The official index was created by the PBOC in late 2015 after the central bank devalued the currency in shock. .
The yuan’s resilience against the dollar could be maintained, keeping the currency high against trading partners, said Zhou Hao, economist at Commerzbank AG.
Some analysts recommend betting against the Chinese currency amid a narrowing of the country’s yield spread over Treasuries and a possible easing of central bank policy if the Evergrande crisis worsens .


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