By WANG Yu

China’s yuan fell below 6.9 per US dollar on Monday, following Federal Reserve Chairman Jerome Powell's remark last Friday that US interest rates would remain high for a sustained period to bring down inflation.

The onshore yuan fell to 6.92 during the day. Offshore yuan was below 6.93 at some point. The yuan has lost more than 2.5 percent against the dollar since August 15 when the People’s Bank of China cut key interest rates to support the economy. The market is closely watching the politically sensitive 7-yuan-per-dollar threshold.

The market expects another 75-bps increase in September. The US Dollar Index, which measures the dollar against a basket of currencies, has gained 14 percent year to date. It jumped another 0.6 percent to above 109 on Monday.

“Globally, inflation pressure is high. Monetary policies are tight. Recession risk is still there. The dollar is getting stronger. This may start a perfect storm of currency depreciation, sovereign debt default, and energy and food shortage for the emerging market,” said ZHENG Jiawei, Chief Fixed Income Analyst at Shanghai Securities. He expects the yuan-dollar exchange rate to remain close to 7 in the short run.

GUAN Tao, Chief Economist at BOC International, said in a recent report that the weakening of yuan since this spring is a combined result of strong dollar, underperforming domestic economy, and widening US-China interest rate spread.

The economy hasn’t rebounded as fast as expected after this year’s pandemic outbreaks. Growth in key economic metrics including consumer spending, manufacturing investment and industrial output slowed in July, missing expectations

The People’s Bank of China has cut key interest rates twice this month – one-year medium-term lending facility and seven-day reverse repos were each lowered by 10 basis points on August 15, and one-year and five-year loan prime rates by 5 and 15 basis points respectively on August 22 – while the US will keep raising rates for the foreseeable future.

“The US-China interest rate spread will keep widening for the rest of the year. The dollar will be stronger. The yuan will depreciate,” said WANG Qing, of Golden Credit Rating International. He expects the exchange rate to fluctuate between 6.7 and 6.9 until year-end.

He pointed out however that the yuan has depreciated slower than the dollar has been gaining value, buoyed mainly by China’s strong export and market confidence that the economy will eventually bounce back from the pandemic. The US Dollar Index has increased 3.4 percent since mid-August while the yuan lost 2.47 percent against the dollar. “Depreciation may not gain steam given economic recovery and trade surplus,” he said.