Dollar Stagnates as Yuan Rises Against US Rate Hike
On the last trading day of 2022, the onshore exchange rate of the Chinese yuan recaptured the 6.90 threshold, while the offshore exchange rate also broke through 6.91, with the maximum daily increase reaching 700 points.
In 2022, the Chinese yuan experienced a significant devaluation, mainly concentrated in two time periods. The first period was from late April to June, and the second period was from mid-August to late October.
However, the depreciation of the yuan against the US dollar was not due to a significant change in the economic strength comparison between China and the United States. It was merely a result of the continuous interest rate hikes by the US dollar and a slight reduction in interest rates by the yuan, leading to an increased interest rate gap between the two countries and causing exchange rate fluctuations.
The US dollar began to raise interest rates in March, with the first increase of 25 basis points. It was also from this time that the exchange rate of the yuan against the US dollar started to decline. Subsequently, as the US dollar's interest rate hikes became larger, the depreciation of the yuan also expanded.
However, the US's hope to continuously raise interest rates and suppress other currencies did not always go as planned.
In November, the Federal Reserve's interest rate meeting decided to raise rates by another 75 basis points. Contrary to expectations, after this decision, the yuan's exchange rate experienced a significant increase, rising by 2900 points throughout November.
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In December, due to increasingly evident signs of economic recession, the US had to reduce the interest rate hike to 50 basis points. Logically, even with a 50 basis point increase, it would still widen the interest rate differential between China and the US, favoring the further strengthening of the US dollar. However, unexpectedly, after this rate hike, the yuan rose again in December and broke through the 7.0 threshold.
It is clear that these two cumulative interest rate hikes of 125 basis points did not have the expected effect on the US.Under normal circumstances, exchange rates often reflect the demand for currencies in the international market. When there is a higher demand for a country's currency, the value of that country's currency appreciates more quickly.
Due to continuous interest rate hikes in the United States last year, many funds sought to buy dollars, which in turn increased the demand for the US dollar, leading to its appreciation.
In addition to the demand for investment in the foreign exchange market, a larger demand comes from trade.
Last year, our country's trade surplus continued to expand. According to data released by the General Administration of Customs in December, the trade surplus for the first 11 months had already reached 5.34 trillion yuan. This means that our country's foreign trade enterprises have earned a large amount of foreign exchange.
At the same time, a surplus means that income is much greater than expenditure. A significant portion of the recovered foreign exchange cannot be spent, thus there is a demand to settle it into Renminbi.
This is actually the process of selling foreign exchange and buying Renminbi, which is reflected in the exchange rate as strong support for the appreciation of the Renminbi.
On the other hand, although the US exchange rate has been strengthening, it does not have economic support.
As mentioned earlier, the rise in the US Dollar Index is mainly due to the continuous interest rate hikes in the United States, which have widened the interest rate differential with other currencies, causing the exchange rate to rise.
Once the expectation of future interest rate hikes for the US dollar weakens, or the US dollar actually stops raising interest rates and even reverses to lowering interest rates, the part that has risen before will quickly fall back.On the economic front, many economic indicators in the United States are showing increasingly negative trends.
The most direct evidence is that despite the continuous appreciation of the US dollar, the country's purchasing power is shrinking, which has led to a significant decrease in US commodity imports, contrary to what economists had predicted.
Some financial media have observed that since October, there has been a substantial decrease in the number of containers arriving at various US ports.
Media outlets in Vietnam and India have also pointed out that production orders received from the United States have significantly decreased compared to the first half of the year, with some even experiencing a drastic reduction by half.
It can be anticipated that in 2023, the economies of China and the United States will follow completely different trajectories. Under these circumstances, it is inevitable that the Chinese yuan will continue to strengthen, with its exchange rate continuously rising.
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