Macroscope | How the Federal Reserve’s monetary policy is setting up the US dollar for a fall

Decision-makers in Washington appear less enthusiastic about having a strong US dollar to encourage consumers to buy goods made overseas

China may have to get used to the idea of a further rise in the yuan against the US currency, even though it may not welcome the prospect

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A clerk checks US$100 banknotes at the headquarters of Hana Bank in Seoul, South Korea, on July 5. Currency markets will price the US dollar based on what Washington does, not what it says. Photo: EPA-EFE

Published: 5:50am, 8 Sep 2021

The Chinese yuan has performed well versus the US dollar in the past 12 months, even as the broader value of the dollar has held up pretty well against major currencies.

Whether China would welcome a further rise in the yuan against the US currency is questionable, but it is something Beijing might have to face as current US policy settings could be lining up the dollar for a fall.

On the Chinese side of the dollar-yuan equation, China’s export sector will gain from a slightly weaker yuan. Some economists are warning that recent declines in purchasing managers’ indices suggest China’s economy is facing headwinds that extend beyond the effects of recent Delta variant outbreaks.

There is also an argument that a degree of yuan weakness might be a logical outcome if international investors become unnerved by the potential implications of changing policies in Beijing. However, the emphasis should be placed less on the yuan aspect of the equation and more on the US dollar side.

In a world where globalisation was perceived by Washington as a net benefit for the US economy, a degree of dollar strength which gets American buyers more bang for their buck when purchasing goods made overseas has a certain appeal.

But with the United States and China now at odds on many issues and with US politicians – both Democrats and Republicans – having increasingly identified the Chinese economy as the true winner from globalisation, Washington appears less enthusiastic about the concept.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | How the Federal Reserve’s monetary policy is setting up the US dollar for a fall

Macroscope | How the Federal Reserve’s monetary policy is setting up the US dollar for a fall