Macroscope | China right at the core of the changing global currency constellation
The dollar’s dominance has faded in recent months, so is the time now right for China to take centre stage?
The US dollar may have previously been one of the brightest stars in the currency firmament, but recently it has waxed and waned.
Some currencies have shone more brightly while others continue to fade. “It is the time for divergence,” US firm Morgan Stanley wrote on Friday last week as the dollar “continues to develop a mixed performance”.
The currency markets will continue to closely watch events in the United States, and Friday’s upgrade to first-quarter US gross domestic product growth only reinforced the view that the Federal Reserve will raise interest rates again in June.
But there are other factors arguably also exercising a gravitational effect on currencies.
China is one such factor, given the size of its economy. Beijing is managing a variety of policy goals. A desire to transition from an export-led economic model to one driven by domestic demand combines with measures to address an over-expansion of credit. At the same time, Beijing is seeking to ensure the stability of the yuan ahead of China’s 19th Party Congress later this year.
China’s policies clearly have implications for other countries whose own economic interests have become closely aligned to a pace of Chinese economic expansion that Beijing is now seeking to pare back to a slower but more sustainable rate.