Tighter US monetary policy is in the offing and should continue to provide general support for the US dollar on the foreign exchanges. China’s coronavirus-related lockdowns are a big headwind for the economy, justifying a weaker yuan from a currency market perspective.

While the dollar peg has served the city well, that is no guarantee it will always be the case. Given local economic conditions and growing geopolitical rivalry, Hong Kong needs to ask if following the US’ lead on monetary policy is still wise.

While a hawkish turn in US monetary policy is driving the value of the dollar, China’s plan to boost spending is likely to raise the price of dollar-denominated commodities. As a result, countries that must purchase US dollars to buy commodities may find themselves in a dilemma.

Rising US Treasury yields and the ripple effects of China’s ‘zero-Covid’ policy are adding to the allure of the US dollar for investors. Negative reactions to China’s neutrality over Ukraine also raises the chances of Western investors pulling out of Chinese assets and the yuan.

Washington’s move to freeze Russia’s central bank assets has cast doubt over the once unquestionable safety of US Treasuries holdings. Should dollar supremacy seriously begin to wane, it may be time to re-evaluate the over three-decade-old US-Hong Kong dollar peg.

Hawkish sentiment in the US and more easing in China could leave policymakers in Asia-Pacific countries exposed to both in a difficult spot. For currency investors who are adept at reflecting changing circumstances and identifying value, though, this divergence spells opportunity.

Three of the world’s largest economies – the US, China and Europe – are each in a different predicament. This has implications not only for the dollar-yuan exchange rate but also for yuan internationalisation.

This year is not 2015, and Beijing must look beyond Japan’s short-term competitive edge to preserve China’s wider interests. The monetary conditions and deflationary mindset in place are unique to Japan’s economy, and China would be well advised to stand firm.

Beijing’s fiscal and monetary policy options should insulate it if tighter Fed policy tips the US economy into recession. The combination of broad pledges of government support and a shift towards an economy more driven by domestic demand will ease China’s exposure.

Western sanctions cutting Moscow off from its foreign reserves give China greater incentive to move away from the US dollar and euro, and may push other countries to follow suit. Beijing may also be tempted to buy discounted Russian commodities as prices surge elsewhere.

Commodity prices were already high, and the war in Ukraine will make the energy, food and raw materials that drive China’s economy even more costly. Given the risks, Beijing might well conclude its interests are best served by not going far beyond ‘normal’ trade with Russia.

The Chinese economy is the world’s manufacturer but it needs to import a vast amount of energy, raw material and food. With commodity prices spiking due to Russia’s invasion of Ukraine and growing risks of imported inflation, the yuan’s resilience is a positive sign.

Given the high US inflation rate, whatever the Fed does in the coming months, the reality is that investors in US Treasuries will be earning a negative real return. With China, however, investors can be sure that fiscal and monetary policy will remain stimulatory to support the economy.

Since the inflationary pressure on the US is partly a consequence of supply chain dislocations, fast and hard rate hikes won’t be enough if Chinese production does not get back into top gear. Such considerations are why investors expecting the US dollar to strengthen against the yuan may be disappointed.

China’s economic activity has slowed amid headwinds from the Lunar New Year, Winter Olympics and the ongoing ‘dynamic zero infection’ strategy. Once China’s economy returns to form, though, it will fuel further rises in oil prices that are already at a seven-year high.

While a narrowing yield differential would normally make the renminbi less attractive, China’s economic heft and increasing trade surplus support a strong currency. The trend of rising global energy and commodities prices should also be on investors’ radar with regards to currencies of producer countries.

The spike in US inflation has seen the Fed turn hawkish, but do not expect a return to the all-out campaign against rising prices of the Volcker years. In Hong Kong, where CPI is way below the US inflation rate, but whose monetary policy must track the US’, this approach will suit it just fine.

Hong Kong consumers will not be totally spared from rising prices as policy decisions at home and elsewhere take effect. Even so, Beijing’s commitment to curbing inflation and the Hong Kong dollar’s reliable peg should insulate the city from the worst effects.

While Washington is living with the virus and tightening policy, Beijing sticks with its approach and seeks monetary policy support. This underpins the US dollar’s value versus the yuan at the same time as its spillover effects drive weakness in other Asian currencies.

China’s economy will face continuing problems in the property sector, costs from its zero-Covid strategy, slowing exports and factory closures. Even so, most of the issues stem from conscious and presumably well-considered decisions by policymakers.

The Fed and Bank of England tilt is in stark contrast to the dovish tone from Beijing, where recent People’s Bank of China decisions suggest to currency markets that officials would rather not see the yuan continue to strengthen.

Plummeting pork prices have helped offset increases in other foods, but with the rising cost of food a global issue – and high energy prices that will hit food production – Beijing officials can’t afford to rest easy

While the US central bank is waking up to the need to respond to rising inflation, China looks set to stick with supportive monetary policy. If this divergence continues, it could erode the yield differential that currently favours the renminbi over the US dollar.

The yen’s safe-haven status explains why investors favour it in times of uncertainty, but greed will overtake fear. The interest rate differential against Japan’s currency, which increases the cost of holding yen, and the continuing weakness of the Japanese economy will reassert themselves.

Oil supply will remain tight as investors turn away from hydrocarbons even as demand rises with pandemic recovery and the building of a renewable energy network.

The US dollar is being supported by rising consumer prices and sentiment that the Fed might accelerate the tapering of its bond purchases. Investors seeking to benefit from yuan appreciation should look to Europe, Britain and Japan.

Given China’s manufacturing heft, it is no surprise that it is the world’s biggest carbon emitter. But Beijing is also taking practical measures to transition to a carbon neutral economy, and inspiring other developing countries in the process.

As yield differentials that previously favoured the yuan narrow, the currency market might see more reasons to favour countries such as the US that have tightened monetary policy, and, by extension, fewer reasons to hold the renminbi.

The weaker yen is making Japan’s import bill worse, from energy to raw materials, amid supply bottlenecks. But there is little Japan can do to make currency markets listen in a global inflationary environment.

China is committed to carbon neutrality by 2060 but in the short term, Beijing simply has to address an energy shortfall and keep the lights on. By moving manufacturing to China, the West has offshored some of its carbon emissions. It is not in a position to criticise Beijing.