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Yuan Rebounds At The Expense Of The U.S. Dollar

Yuan

The yuan is up half a percentage point against the dollar on Friday 1300 hrs ET after enduring a rocky session that sent it tumbling 1.3 percent in the space of a week after China’s PBOC devalued the currency by the most since 2016

President Trump countered by criticizing Beijing for allowing the currency to “drop like a rock” and criticizing the Fed and a strong dollar.

The yuan is currently changing hands at 6.769 to the dollar from a low of 6.812, in big part due to the dollar’s latest woes.

The erstwhile high-flying dollar has dropped 0.65 percent on Friday after Trump kvetching about Fed policy and the continuing strength of the greenback. The Dollar Index had hit a one-year high prior to Trump’s latest tirade.

(Click to enlarge)

Source: Investing.com

Currency Wars

The latest events suggest that the ongoing trade war between the U.S. and China might quickly degenerate to currency wars and put paid China’s pledge that it made about a month ago not to use the yuan as a stick against the U.S.

Beijing is no stranger to currency manipulation, devaluing the yuan or propping it depending on its objectives.

Prior to the beginning of the trade wars in March, the yuan climbed about 10 percent against the dollar since the beginning of 2017, thus reversing three consecutive years of depreciation. The move was seen as Beijing’s effort to appease Trump and quell criticism that the world’s second economy had been suppressing the currency in order to gain an advantage over its trading partners.

But things went south again after trade tensions between the two countries intensified.

The yuan has weakened considerably against the dollar this year, dropping 7.2 percent against the buck since March. And it might drop even further should Beijing return fire if Trump makes good his latest threat to bring all of China’s exports to the U.S.—worth $504 billion—under tariffs. Related: Gold Investors In A Frenzy Over Sunken Russian Warship

There’s no good reason to believe that China has any intention to stop managing its currency in the background according to its whims. The country seems to have mastered the art of tinkering with the yuan, all the while keeping the RMB Index stable.

The RMB Index, China’s equivalent to the Dollar Index, is a trade-weighted index hat pits the yuan against a basket of currencies including the euro and Japanese yen. The index remained relatively stable even as the yuan appreciated strongly against the dollar in 2017 and early 2018.

So, China can still use the yuan to try and gain some leverage against the U.S. and probably be none the worse for wear.

Trump, the New Erdogan?

Back home, Trump’s highly unorthodox style of criticizing the Fed for its hawkish policy and the dollar’s strength has drawn comparisons to Turkish President Tayyip Erdo?an. Erdo?an is notorious for criticizing the country’s central bank and calling for lower interest rates in a desperate bid to gain political expediency and maintain his popularity.

Bart Hordijk, market analyst at Monex Europe, writes,

‘‘The US dollar sold off across the globe [after Trump’s attack] and the question on every FX trader’s mind is; is the US becoming the new Turkey?

“The answer seems, “no, but....”. The Turkish lira lost almost 30% of its value this year mostly because Turkish President Recep Erdo?an is firmly set against higher rates (just like Trump) and is attacking the independence of the central bank (just like Trump).’’

This was not the first time though that Trump has voiced his opinion about the dollar. He has done that many times before, including before his inauguration:

(Click to enlarge)

Source: The Guardian

By Alex Kimani for Safehaven.com

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