“The conclusion that the US government will prevent US dollar depreciation may be due to the market over thinking [Yellen’s statement],” said Guan Tao, a former official with China’s foreign exchange regulator, the State Administration of Foreign Exchange.

Yellen also said that the intentional targeting of exchange rates to gain commercial advantage was unacceptable, and she would oppose such attempts.

“The value of the US dollar and other currencies should be determined by the markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy. The United States does not seek a weaker currency to gain competitive advantage,” Yellen told US Senate lawmakers at her confirmation hearing last month.

Khoon Goh, head of Asia research at ANZ Bank, said Yellen’s focus on having the market determine exchange rates suggested that she would continue with where the Trump administration left off by putting pressure on economies that are deemed to have undervalued currencies.

“It is clear that the US wants to see a strengthening of Asian currencies,” said Goh.

“We believe the region’s policymakers will be more receptive towards allowing their currencies to appreciate, given the strong export outlook,” Goh explained, adding that attempts by China to intervene in markets and suppress the yuan’s gain have so far been modest.

Last year, the yuan rose 6.3 per cent against the US dollar due to a combination of a weak US currency and China’s rapid economic recovery from the coronavirus.

“[China] has allowed the yuan to appreciate. It has been one of the best currencies in the world, so there is no reason why the US would be justified in calling China a currency manipulator,” said Mark Matthews, head of research for Asia-Pacific at financial firm Julius Baer.

“Currencies of the West will be naturally weaker because of their governments’ change away from austerity to fiscal stimulus. So with that in mind, actually we foresee the yuan continuing to appreciate.”

Serena Zhou, an economist of Mizuho Asia in Hong Kong, however, said Beijing does not want excessive appreciation of the yuan, especially when high US tariffs are still in place on Chinese goods.

“The Chinese economy is not strong and well prepared enough [to have a strong yuan],” Zhou said, predicting the yuan’s rise will slow this year, gaining only 3 per cent to 6.3 per US dollar by the end of 2021 having fallen below the threshold of 7 to the US dollar as recently as July before rising sharply through the end of last year and into 2021.

A lower yuan exchange rate figure means it takes fewer yuan to purchase one US dollar, indicating a stronger Chinese currency.

01:16

Is China a currency manipulator?

Is China a currency manipulator?

US currency policy, according to Guan, has little to do with the direction of US dollar moves, but more with insisting on a strong economy that is good for the world, which will in turn strengthen the exchange rate.

The US can still influence the US dollar exchange rate since its overall economic policy remains a powerful tool with spillover effects to other countries, Guan added.

In fact, at times when the US Federal Reserve raises interest rates, prompting the US dollar to appreciate, emerging economies can face pressure from capital outflows and devaluation of their currencies.

In such circumstances, they must either accept the devaluation of their domestic currency and increase in the burden of external debt repayment, or accept the need to defend their currency, which could stimulate more capital outflows or even capital flight.

“[Similarly] when the US enters a low interest rate environment and a weakening dollar cycle, emerging economies will be forced to face the consequences from hot money inflows and pressure on their currencies to appreciate,” Guan said.

“At this time, they will either accept the appreciation of their domestic currency and damage to their export competitiveness, or they will have to accept an increase in foreign exchange reserves and provide the United States with low-cost financing.”

In early 1995 when the US dollar was under pressure during the Clinton Administration, then US treasury secretary Robert Rubin stated unequivocally that “a strong dollar was in the interests of the United States”.

01:25

US labels China a currency manipulator as Beijing allows yuan to sink to lowest level in 11 years amid ongoing trade war

US labels China a currency manipulator as Beijing allows yuan to sink to lowest level in 11 years amid ongoing trade war

The US dollar had fallen by as much as 37 per cent after the signing of the Plaza Accord 10 years earlier as the deal undermined the market’s confidence in the US financial system and affected the US dollar’s status in the international monetary system.

Under the Plaza Accord, Japan, France, Germany, Britain and the US agreed to push the value of the US dollar down against the Japanese yen and German Deutsche mark. The five countries began selling large amounts of US dollars, leading to a significant loss in dollar value, and the intervention resulted in the Japanese yen doubling in value against the US dollar in under two and a half years.

Rubin’s policy statement helped to turn around the US dollar, which embarked on a seven-year uptrend, and since then, successive treasury secretaries have uttered variations of his phrase from time to time when asked about the US dollar, regardless of how the currency was trading.

That practice, though, came to an end under the Trump administration, when treasury secretary Steven Mnuchin touted the benefits of a weaker US dollar.