FX speculators drive China’s yuan to 17-year lows

As 2025 begins, few central bank peers envy the tug of war facing People’s Bank of China Governor Pan Gongsheng.

Pulling from one side are currency traders betting Beijing will respond to Donald Trump’s coming trade war with a weaker yuan. On the other side, is Chinese leader Xi Jinping, who until now has opposed engineering a lower exchange rate.

This week, Pan’s team signaled anew its support for a stable yuan by setting its daily reference rate even stronger than the psychologically important 7.2 per dollar level. It did so in response to the yuan dropping past 7.3 per dollar.

Though the yuan is trading at 17-year lows, the downward pressure on exchange rates extends much wider than Beijing. On Monday (January 6), most major Asia region currencies slid as the US currency traded at two-year highs.

“Trump’s trade policy plans are driving renewed expectations of a stronger-for-longer US dollar,” writes BMI, a Fitch Solutions company, in a note. “This has the potential to send prices lower” in China.

Along with “Trump trade” dynamics boosting the dollar, traders are responding to hints from the US Federal Reserve that rate cuts may be few and far between in 2025.

For one thing, US inflation isn’t receding as rapidly as hoped. For another, the American labor market continues to display unprecedented vigor even as global headwinds intensify.

None is bigger than underwhelming Chinese demand amid cratering property markets. The resulting weakness in retail sales and confidence is generating deflation.

“With deflationary pressures mounting despite expectations for more aggressive policy easing, the Chinese 10-year yield has dropped below 1.6%, signaling a flight to safety,” says Carlos Casanova, economist at Union Bancaire