The yuan is becoming a destabilizing factor in the foreign exchange market amid renewed speculation that China’s authorities would tolerate a weaker currency to support the economy.
The Chinese currency has been depreciating at a faster pace since the end of the National Day holiday period in early October, spurring speculation that it could even hit 7 to the dollar. The trend could throw the market into turmoil by triggering a devaluation war with other Asian currencies.
The Chinese authorities sought to hold the yuan’s depreciation in check during a recent string of high-profile events, such as the Group of 20 summit in Hangzhou. The International Monetary Fund also added the yuan to the basket of currencies that make up its Special Drawing Right.
But now that things are quieter, the yuan has weakened sharply, hitting 6.7 to the dollar.
As the market eyes a possible rate hike in the U.S., the dollar is looking firm. On the other hand, China’s economic slowdown remains a worry. Under the circumstances, there is a growing view that the authorities are inclined to let the yuan fall.
Citigroup predicts the yuan could fall to 7, or even further, against the dollar in 2018. The U.S. bank is not alone: A majority of currency market players expect the yuan to decline against the dollar in the medium to long run.
The yuan has tended to move in the same direction as the dollar. When the dollar appreciated through last year, the Chinese currency also strengthened. As a result, the yuan gained value against the euro as well as the yen and other Asian currencies, eating into China’s export competitiveness.
When the dollar began to weaken this year, the yuan followed and depreciated against the yen and other currencies. Keen to avoid a more serious slowdown in the Chinese economy, the U.S. tolerated these trends.
Recently, however, the yuan’s depreciation has accelerated while the dollar appears to have bottomed out. Chinese authorities, evidently, are OK with this.