China’s yuan hits two-year low against the dollar

The value of the yuan has fallen to the lowest level against the dollar in two years and is likely to weaken further as the People’s Bank of China (PBoC, the Chinese central bank) mobilizes to combat the economic slowdown and a serious housing crisis.

On Tuesday (23), the yuan was traded at 6.86 to the dollar in the highly controlled market. onshore from China, touching levels last seen in August 2020, according to FactSet.

In the market offshorewhere business is less controlled, the Chinese currency weakened to around 6.88 per dollar, bringing the year-to-date decline to more than 8%.

The latest settlement of the yuan is partly due to the continued appreciation of the dollar.

But it was also triggered by a recent series of data that point to fragility in China’s economy. In July, factory output, investment, consumer spending and youth employment figures showed broad economic weakness.

The PBoC has been cutting its key interest rates since last week in a bid to revive China’s economic recovery. The cuts, however, have been detrimental to the value of the yuan against the dollar as the Federal Reserve (Fed, the US central bank) has been moving in the opposite direction.

The Fed raised its benchmark rates by 75 basis points in both June and July, in its most aggressive campaign of rate hikes since the 1980s. Traders are divided on the Fed’s chances of doing the same at the September meeting. or opt for a more moderate adjustment of 50 basis points.

Investors await a speech by Fed Chairman Jerome Powell during a symposium of economists in Jackson Hole (Wyoming), on Friday (26), to look for clues about which path the US central bank should take.

The Fed’s monetary tightening cycle has triggered a broad sell-off of Asian currencies this year, including drops of more than 10% in the Japanese yen and the South Korean won.

The yuan has also been hit hard but has found more support than other currencies as traders bet on the long-term health of the Chinese economy, according to global market strategist at JP Morgan Asset Management, Chaoping Zhu.