Forex Comment Aug 19

Same old: US dollar down more, China yuan up more

The US dollar keeps moving in the opposite direction under its ever-heavier debt load and the economic outperformance of major competitors

Same old: US dollar down more, China yuan up more
Image: Reuters.

(ATF) The People's Bank of China set yuan central parity against the fading US dollar at 6.9168 this morning, the strongest since January 23.

If you think of the PBoC's parity rate as forecasting the direction of the traded exchange rate, a 6.91 handle in the course of the day may have appeared ambitious, but it turned out just right and then some: the offshore yuan (CNH) stood at 6.9015 – up 0.07% for the day – at 6pm HK time.

The US dollar keeps moving in the opposite direction under its own ever-heavier debt load and relative economic outperformance of major competitors.

At 9am, it stood at a low point of 92.1910 on the dollar index (DXY) – though it has come back in a bit since then to 92.2800, down 4.17% for the year to date. Even Bloomberg has noticed and titled this "Dollar Erases Trade-War Gains After Sinking to Lowest Since 2018" (on the Bloomberg dollar gauge).

The euro, meanwhile, traded at just below 1.20 to the US dollar today, at 1.1940 at 6pm, up 0.08% for the day and a year-to-date return of 6.6%.

Dollar misery

The dollar's misery is not necessarily to either European or Chinese exporters' liking. But neither the ECB nor the PBoC are going to attempt to catch a falling knife and buy dollars or dollar assets whose value will certainly continue to decline as long as the US fails to get its Covid-19 pandemic under control, or adopt sensible economic policies for sustained economic recovery rather than desperate strategies designed to impede competitors.

Perhaps such pathetic US attempts to cope with economic crisis will cease after November 3 and be replaced by a modicum of reason rather than political venom. But as an investor, it would not be wise to count on that and diversification into non-USD assets is the obvious hedge.

Unfortunately, the current US policy stance of adding enormous amounts of debt to the balance sheet, debt which is largely incurred for the purpose of emergency hand-outs rather than any kind of productivity enhancing investment, has every chance of leading to a rekindling of inflation after 12 years of none.

The warning signs are very much in evidence and US real interest rates stripping out inflation are falling further into negative territory. Further dollar decline is inevitable when the principal determinant of the exchange rate, interest rates differential, turns more against the USD.