China’s yuan breaching key level of 7 per US dollar for first time in over 2 years creates quandary for Beijing
- Onshore yuan opened at 7.0054 on Friday from Thursday’s close of 6.9775 having last weakened to 7 per US dollar in July 2020
- Analysts attribute the weakening of the yuan to the fast strengthening of the US dollar, with the US Federal Reserve also set to announce a further interest rate increase
China’s yuan breaching the psychological threshold of 7 per US dollar for the first time in more than two years has triggered speculation over whether and how the central bank should intervene.
Analysts largely attribute the weakening of the yuan to the rapid strengthening of the US dollar with its index rising by 14.3 per cent so far this year, reaching a 20-year high, amid the belief Beijing will not respond and change its policy course immediately.
The looming decision by the US Federal Reserve whether to further increase interest rates next week adds another layer to Beijing’s predicament as it aims to maintain financial stability ahead of the 20th party congress next month.
In the light of the divergence – loose domestic liquidity versus external tightening – and the weak domestic economy, depression pressure on the yuan exchange rate will continue to exist
“The strengthening of the US dollar index is the direct reason for this round of yuan depreciation. It was also dragged by higher US bond yields than Chinese ones and concerns over economic slowdown,” said Ping An Securities analyst Wei Wei.