Published: Sun, August 11, 2019
Markets | By Otis Pena

A U.S.-China Currency War? What You Need To Know

A U.S.-China Currency War? What You Need To Know

A weaker yuan would give Chinese exporters a competitive price advantage over foreign rivals.

The U.S. dollar is too strong and is hurting exports, President Donald Trump said on Thursday, attacking the Federal Reserve for keeping interest rates higher than he would like.

The trade war is weighing on the global economy. The currency is now trading at just over 7 yuan to the dollar.

In a statement, the Chinese Central Bank said it had "the experience, confidence and ability to keep the yuan exchange rate at a reasonable and balanced level, while the markets were playing the yuan down, falling to almost 7.11 to the dollar early in the day, before a recovery suggesting that the central bank would intervene to calm the markets".

His tweet came a day after Trump said that the United States was talking to China but asserted that Washington was not ready to strike an agreement with Beijing, ruling out an immediate breakthrough to end the trade war.

The People's Bank of China set the mid-point, which limits the yuan's onshore movement, at 7.0136 per dollar on Friday, 97 pips weaker than the previous fix and at the lowest since 2008 for a second consecutive session. A wider yield gap could mean less capital outflow pressure from China and is supportive for the Chinese currency. "China has devalued its currency by over 10% with the express goal of neutralizing tariffs, full stop".

Typhoon kills 28 in China, 20 missing
Policemen transfer the flood-stranded people in Putuo scenic area of Zhoushan City, east China's Zhejiang Province, Aug. 10, 2019. It earlier handed Taiwan, skirting its northern tip and causing a handful of injuries and a few property wound.

The following explains the working of China's currency regime. According to TD Securities senior foreign exchange analyst Mazen Isa, Wednesday night's fixed over-7 handle and the markets in general "seem to be taking the shift fairly well, so probably some calm is needed in the market at least for the near term".

The International Monetary Fund sees little evidence that China's central bank has deliberately reduced the value of the nation's currency - a position at odds with the Trump administration's decision this week to accuse Beijing of manipulating the yuan.

" Quoting statistics, on Thursday's (August 8th) market closure, USA dollar index (DXY) measured against a basket of six major currencies in an average, had been a penny up to 97.61, while euro slid 0.07 percent to $1.1193 against its American counterpart and the British currency ended the flatlined to $1.2140".

Signs of Chinese yuan and USA dollar are seen at a currency exchange store in Shanghai, China August 8, 2019.

Under a 1988 US currency law, the main objective of the designation is to force negotiations with the offending country to eliminate any unfair advantage.

The Fed trimmed rates by 25 basis points for the first time since the financial crisis on July 31, but China did not follow as some market watchers had expected.

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