Chinese yuan continues to decline, as US dollar gains more ground

PUBLISHED : Tuesday, 20 December, 2016, 4:20pm
UPDATED : Tuesday, 20 December, 2016, 4:20pm

The Chinese yuan traded weaker on Tuesday, as the US dollar continued to edge up.

Onshore yuan in Shanghai dropped 0.01 per cent or 4 basis points to 6.9509 as of 2pm,while offshore yuan traded in Hong Kong slumped 0.18 per cent or 126 basis points to 6.9444.

The People’s Bank of China set the yuan’s reference rate lower by 156 basis points or 0.22 per cent to 6.9468 per US dollar on Tuesday. Traders are allowed to trade 2 per cent either side of the reference rate.

But Hong Kong Monetary Authority chief executive Norman Chan Tak-Lam said on Tuesday during a visit to Beijing that there were no “fundamentals” that would explain any sharp decline in the yuan in the future. In the short term, the exchange rate is hard to predict because there are currently so many factors affecting the currency’s performance, Chan added, according to mainland media outlets.

The US dollar index, which tracks the dollar against a basket of six major counterparts, continued to increase, climbing 0.20 per cent to 103.36. Last week it advanced to 103.56, its highest level since 2002, when the US Federal Reserve raised the interest rate by a quarter-point and indicated a more hawkish stance towards future rate rises than expected.

Traders are concerned about the risk of further yuan depreciation if US President-elect Donald Trump officially labels China as a currency manipulator.

“We cannot rule out such a possibility, labelling China a currency manipulator by overriding the established standard will increase US-China trade tension,” said CICC analyst Yu Xianrong. “From a technical view point, China does not seem to qualify for ‘currency manipulation’ now, but may remain on the Monitoring List created in April 2016.”

By labelling China a currency manipulator, Trump might be able to impose tariffs on Chinese imports, Yu added.

“However, singling out China will overthrow the established assessment framework and the long tradition of solving currency disputes through bilateral engagement,” Yu said. “It might also lead to trade retaliation from China.”