Macroscope | Donald Trump won’t like it, but a strong US dollar reflects a weak yuan more than American economic strength

The US dollar has had a good run. Indeed, “Money is pouring into our cherished DOLLAR like rarely before,” US President Donald Trump tweeted last Thursday. But what’s really driving the move? Perhaps recent general US dollar strength is as much driven by specific yuan weakness as anything else.

If that assertion is correct, then markets shouldn’t just take a US-centric approach to the greenback’s future prospects; they should also focus on China, especially if media reports of a summit in November between China’s President Xi Jinping and his US counterpart are correct.

When the Hong Kong Monetary Authority found itself having to defend the Hong Kong dollar against the US dollar in April and May, Derrick wrote, what drove the move “appeared to be a blowout in the three-month Libor/Hibor spread to levels last seen in 2007”. Yet, in recent days, although the spread has only widened out slightly since late July and stood “well short of the levels hit in April”, the HKMA had to step back into the market as the Hong Kong dollar weakened to 7.85 against the greenback.

The US firm links this Hong Kong dollar weakness to accompanying yuan depreciation, making the additional point that “renewed weakness seen in the Hang Seng Index since mid-June” coincided with a fall in the yuan’s value following the US imposition of trade tariffs.