Jerome Powell took office as the new Federal Reserve chairman on Monday. And a global currency war could be just around the corner.
Since the beginning of the year, the US dollar index has basically entered a medium-term downtrend.
The dollar has weakened against other major currencies like the euro, Japanese yen and China’s yuan.
The strength of the yuan has been underpinned by China’s better than expected economic growth and tightening monetary policy.
Premier Li Keqiang said last month that China’s 2017 GDP growth was expected to be around 6.9 percent, with foreign exchange reserves rising.
A number of other factors also contributed to the stronger yuan, including tighter restrictions on foreign exchange settlement and offshore investment as well as financial deleveraging initiatives.
The dollar rallied after minutes of the latest Federal Open Market Committee meeting showed that US inflation is likely to keep going up for rest of this year.
But the greenback is likely to remain weak under US President Donald Trump’s trade policy, and would continue to put appreciation pressure on the yuan.
The daily fixing rate from the People’s Bank of China hit a new high on Jan. 25, the highest level since December 2015, following a nearly 6 percent gain in 2017.
As an overly strong yuan would be negative for China, the central bank may lower the daily fixing rate or use counter-cyclical adjustments to offset the currency appreciation pressure.
The full article appeared in the Hong Kong Economic Journal on Feb 5
Translation by Julie Zhu
[Chinese version 中文版]
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