China's currency dropped on Tuesday to nearly eight-year lows against the dollar as a rise in the greenback continued to weigh on the yuan. The dollar was fetching as much as 6.8640 yuan during Asia trade on Tuesday, according to Reuters data, with the Chinese currency at its weakest since at least January 2009, during the global financial crisis. That followed China's central bank, the People's Bank of China (PBOC), setting its daily fix at 6.8495 yuan against the dollar, compared with Monday's 6.8291 yuan. Tuesday's fix was the weakest for the yuan since 2008. Last year, China changed its market mechanism for setting the yuan's daily fix to be based on the previous day's close, theoretically allowing market forces to play a greater role in its direction. China's policy makers allow the yuan to move within a 2 percent band around the daily fix and fixings in the past had been a bit more arbitrary. Analysts pinned the move in the yuan to the U.S. dollar's rise in the wake of Donald Trump's surprise U.S. presidential election win last week. "It's really a U.S. dollar story at the moment," Roger Bridges, global rates and currencies strategist at Nikko Asset Management, told CNBC's "Street Signs" on Tuesday. He noted that on a trade-weighted basis, the yuan went up a bit. But he added, "given that I think the U.S. dollar has broken through the last December's highs, we could see further strength in the U.S. dollar and that could put further weakness onto the yuan, particularly against the U.S. dollar." The dollar index, which measures the dollar against a basket of currencies, traded as high as 100.22 in U.S. trade on Monday, up from levels below 97 prior to the U.S. election. The dollar index rose as high as 100.51 in December 2015 as the U.S. Federal Reserve prepared to raise interest rates for the first time since 2006. Trump's plans to provide fiscal stimulus have led some analysts to anticipate an acceleration in inflation and spurred a rise in bond yields, which could continue to support demand for the greenback. On December 16, 2015, the Fed hiked rates by 25 basis points to a 0.25 percent to 0.5 percent range from a 0 percent to 0.25 percent range. Others also pointed to the moves in the dollar to explain the yuan's drop. Jason Daw, a strategist at Societe Generale, said in a note on Tuesday that the fix's sharp rise over the past two weeks was "wholly consistent" with the rise in the dollar index. "While the PBOC might prefer to slow the pace of depreciation, the dollar trend is a key factor in their decision process," Daw said. "Additionally, yuan trading volume remains elevated, which typically coincides with more capital outflows and yuan depreciation pressure." He expected the yuan could weaken to 7.10 against the dollar over the next year, compared with consensus forecasts for 6.90. Analysts widely expected that the Fed will hike by another 25 basis points at its upcoming December meeting. While the move in China's currency may appear large, the fixing at 6.8495 may represent some support from policy makers. In a note Tuesday morning, analysts at Nomura had expected the fix would be at 6.8595, based on the levels of the trade-weighted basket, mainly on drops in the yen, euro, Malaysian ringgit and British pound. But Patrick Bennett, a foreign-exchange strategist at CIBC, said the PBOC was likely aiming to keep the fix relatively stable, noting that while there was a depreciation trend overall, policymakers likely didn't want the level to lurch higher one day and then fall sharply the next. "It was about where we thought it would be. It's in line broadly with the dollar being firmer," he said, adding that he expected the U.S. dollar to head even higher, with the greenback getting to as high as 6.90-6.95 yuan by the end of the year. The mainland's currency has been a source of political tension with the U.S., with President-elect Trump vowing during his campaign to label the country a currency manipulator for the purposes of a competitive trade advantage and impose a 45 percent tariff on its exports to the U.S. China does not meet the U.S. requirements for getting slapped with the manipulator label, which typically means the U.S. would engage in additional negotiations with the country. The U.S. Treasury's rules and regulations require three criteria before the U.S. could impose "meaningful penalties" on countries that failed to adopt appropriate trade policies: a significant bilateral trade surplus with the U.S.; a material current account surplus larger than 3 percent of gross domestic product; and persistent interventions to keep its currency weak. According to the Treasury's assessment report in October, China only met the first criteria. Analysts have said that imposing the tariffs and manipulator label could cause further weakness in the yuan as Chinese policymakers would lose incentives to support the currency. CIBC's Bennett noted an irony to Trump's positions on China's currency. "At that point and probably even now, the extended weakness of the yuan will certainly raise the ire of the new administration. But whose role might it be to tell President-elect Trump that it is partly due to his policy ideas that the Chinese currency is weakening? As are other currencies against a stronger U.S. dollar," Bennett said separately in a note on Tuesday. Others also noted issues with how yuan weakness may play out with the new U.S. administration. "It may not be easy to separate out U.S. dollar strength, from 'manipulated' yuan weakness," Deutsche Bank said in a note dated Sunday. "If China is labeled a currency manipulator on day one of the Trump presidency, dollar/yuan will remain a frontier for new skirmishes in the old 'currency war,'" the bank said. "It is plausible that the dollar/yuan exchange rate could get caught in a test of realpolitik muscle, where China still holds some powerful cards. This includes directing the yuan in a way that hurts U.S. risky assets and impacts Fed policy." Source: CNBC
