US dollar strength has ‘reached peak’, China’s central bank says, as Fed considers scaling back rate hikes
- China’s yuan hit a two-week high against the US dollar on Thursday after US Federal Reserve Chair Jerome Powell said rate increases could be scaled back
- Article by China’s central bank said that possible slower interest rate increases by the US Federal Reserve could suppress the ‘upward momentum of the dollar’
The current round of US dollar appreciation has “reached its peak” with “limited” upside, according to an article by China’s central bank, published in a bid to play up market sentiment amid yuan weakness and record outflows from Chinese assets.
China’s yuan hit a two-week high against the US dollar on Thursday, with the American currency coming under pressure after US Federal Reserve Chair Jerome Powell said rate increases could be scaled back “as soon as December”.
And possible slower interest rate increases by the US Federal Reserve could suppress the “upward momentum of the dollar”, said the article published on Thursday by the Financial News.
“On the whole, the decline in the US dollar is likely to mean that the current round of appreciation has reached its peak, and there is very limited room for subsequent surges,” said the article.
“However, this does not mean that the appreciation cycle of the US dollar has come to an end. The US dollar will remain strong for a period of time to come, and it may take time to go into a depreciation cycle.”
The US Federal Reserve announced a fourth -straight 75-basis-point rate increase in November, which raised benchmark interest rates to the highest level since 2008 and further widened the monetary policy gap between the world’s two largest economies.
The United States is facing the risk of entering into a recession in the first half of 2023, the Financial News article added, and because there are constraints when it comes to fiscal expansion, it may prompt the US Federal Reserve to halt rate increases in the third quarter of next year or even cut rates.
The US Federal Reserve is expected to announce a smaller increase to interest rates in two weeks having already lifted its range from near zero in March to between 3.75 and 4 per cent.
Commerzbank said on Thursday that the recent strengthening of the yuan was likely due to improved sentiment over the prospect of China’s reopening after health officials said they will speed up vaccination for the elderly and warned against excessive control measures by local authorities.
The yuan has recovered in the last few weeks, but it lost as much as 13 per cent against the US dollar this year.
“However, the rally could be temporary as the zero-Covid stance largely remains and the reopening will likely be bumpy and messy,” said Commerzbank.
Since April, yields of China’s government bonds have declined compared to US treasuries, which have attracted record inflow from foreign investors.
But while the yuan is likely to gain against the US dollar in the coming weeks, analysts at Standard Chartered said that a “strong appreciation” is not in sight.
“China’s exit from its Covid-zero policy is likely to be a gradual and lengthy process subject to periodic setbacks and re-tightening, in our view,” they said last week.
“We see China’s overall mobility returning to pre-Covid levels only by the second half of 2023, on a low infection rate and a slow shift in public mindset towards Covid.
“The yuan’s rate differential versus major currencies is also likely to widen further in the first half before stabilising in the second half.”
The People’s Bank of China article also said the economic outlook for the Eurozone is likely to recover next year, which may strengthen the Euro and could introduce weakness in the US dollar.