Yuan Plunges to Four-Month Low on Trump’s Tariff Threats, Sparking Concerns of Further Devaluation and Capital Flight
SHANGHAI – The Chinese yuan plummeted to its weakest level against the US dollar in nearly four months following President-elect Donald Trump’s announcement of sweeping tariffs on goods from Mexico, Canada, and China. The offshore yuan experienced a sharp decline of roughly 0.3%, reaching 7.2730 per dollar, its lowest point since July 30th. The onshore yuan also mirrored this downward trend after the market opened, reflecting investor anxieties over the potential impact of Trump’s protectionist policies on the Chinese economy.
Trump’s proposed tariffs include a 25% levy on all products from Mexico and Canada and an additional 10% tariff on Chinese goods. This aggressive stance has rattled financial markets and raised concerns about a potential trade war that could significantly impact global trade and economic growth. Ben Bennett, head of investment strategy for Asia at LGIM, highlighted the clear downward pressure on the yuan, but also cautioned against excessive devaluation by Chinese authorities, which could trigger capital flight and further destabilize the currency.
The People’s Bank of China (PBOC) attempted to mitigate the yuan’s decline by setting the midpoint rate, around which the currency is allowed to fluctuate within a 2% band, at 7.1910 per dollar. This represented a 450 pip increase compared to the Reuters’ estimate, suggesting an effort by the central bank to bolster the yuan’s value. However, analysts at Nomura expressed skepticism about the effectiveness of this intervention, arguing that the fixing mechanism has limited influence in managing depreciation expectations.
Nomura analysts predict that if the onshore spot yuan surpasses the 7.30 level, market dynamics will shift towards increased dollar demand, posing a challenge for Chinese authorities if they resist further weakening of the yuan fixing. The firm recommended a long dollar position against the yuan, anticipating continued downward pressure on the Chinese currency. The spot yuan opened at 7.2524 per dollar and traded 105 pips lower than the previous late session close at 7.2553 as of 0239 GMT.
Liang Ding, an analyst at research firm Macro Hive, emphasized that the actual implementation and negotiation of the proposed tariffs will be the primary drivers of the yuan’s trajectory in the coming quarters. Given Trump’s campaign rhetoric of "promise made, promise kept," markets may begin to factor in additional risk premia associated with a potential trade war as his inauguration approaches. This anticipation of heightened trade tensions could further weigh on the yuan and fuel market volatility.
During Trump’s first term, the yuan depreciated by approximately 5% against the dollar following the initial round of US tariffs on Chinese goods in 2018. The currency experienced an additional 1.5% decline a year later as trade tensions escalated. As part of his campaign platform to revitalize American manufacturing, Trump pledged to impose tariffs of up to 60% on Chinese imports. These proposed tariffs, along with other policies like tax cuts, are considered inflationary and likely to sustain relatively high US interest rates, putting pressure on the currencies of US trading partners. This broader economic context adds another layer of complexity to the yuan’s outlook, with the potential for further depreciation if US interest rates remain elevated.
The dollar’s six-currency index was down 0.075% at 107.27, indicating a slight weakening of the dollar against other major currencies. However, the yuan’s decline outpaced this broader trend, reflecting the specific concerns related to Trump’s trade policies and their potential impact on the Chinese economy. The situation remains fluid, and the yuan’s future performance will be closely tied to the evolution of US-China trade relations and the broader global economic landscape. The market’s response to any further developments in trade negotiations and policy announcements will be crucial in determining the direction of the yuan in the coming months.
