The U.S. dollar index has experienced a decline of 1.92% since July, according to Wind data. Meanwhile, both the onshore and offshore RMB exchange rates against the US dollar have seen a rebound, reaching the 7.2 mark. Industry experts have been interviewed to provide insights into the weakening of the dollar index and the potential for a sustained rebound in the RMB exchange rate.
The decline in the U.S. dollar index can be attributed to several factors. Firstly, the U.S. non-agricultural data for June fell short of expectations, leading to a change in market expectations for the Federal Reserve’s policy and subsequently driving the dollar index down. Additionally, European bond yields have risen, causing the U.S. dollar to depreciate against the euro since July 6. As the euro holds the largest weight in the U.S. dollar index, this has resulted in a decline in the overall index.
The recent U.S. employment data has also contributed to the weakening of the U.S. dollar index. With only 209,000 non-farm jobs added in June, below the expected 225,000, it is the lowest figure since December 2020. Furthermore, the number of new jobs added in April and May was revised down by 110,000.
Wang Youxin, a senior researcher at the Bank of China Research Institute, explains that the decline in the U.S. dollar index is not solely influenced by domestic factors but also by tightening monetary policies implemented by other developed economies. The pressure on the U.S. economy is increasing, and inflation concerns have eased significantly. As disagreements arise regarding whether to raise interest rates further in September, policymaking has shifted focus from inflation to economic downside risks. The risk of U.S. debt default has also lessened, leading to a decline in risk aversion and weakened support for the U.S. dollar.
While the possibility of the U.S. dollar index falling below the 100-point mark in the short term is relatively low, it is considered a high probability event in the future. Wang Youxin suggests that the Federal Reserve’s tightening monetary policy will weaken support for the U.S. dollar, making a decline below 100 points likely by the end of the third quarter or the beginning of the fourth quarter.
As for the impact on the RMB exchange rate, the weakening of the U.S. dollar will have a negative effect due to the parity effect. However, despite the recent rise in U.S. bond yields, the interest rate spread between China and the United States remains relatively large. Feng Lin, a senior analyst at Dongfang Jincheng, highlights that the biggest impact on the RMB trend is still fundamental factors. Policies to stabilize growth, such as promoting consumption and stabilizing the property market, have been implemented, strengthening expectations for the domestic macroeconomic trend in the third quarter. Furthermore, domestic banks have lowered the interest rate on U.S. dollar deposits, signaling stability for the exchange rate.
Looking ahead, Wang Youxin predicts two stages for the RMB exchange rate in the second half of the year. The first stage is a period of range fluctuation in the third quarter, influenced by changes in the Fed’s interest rate hike expectations. However, as the domestic economy further stabilizes, the RMB exchange rate will gradually stabilize. The second stage, in the fourth quarter, will see the RMB exchange rate enter a stage of steady recovery. With the mounting downward pressure on the U.S. economy and a decrease in U.S. inflation, the fundamentals of the domestic economy will strengthen, leading to increased support for the RMB exchange rate.
Feng Lin believes that the stage of the greatest pressure on RMB depreciation may have passed. With a stronger momentum of economic recovery in the third quarter and the continued fluctuation and weakening of the U.S. dollar index, the pressure on RMB depreciation is expected to ease in the second half of the year, with staged appreciation not being ruled out. Based on fundamental trend comparison, the RMB exchange rate is expected to return below 7.0 before the end of the year.
(Note: This article is a reprint and does not represent the views and positions of the website. It is for reference only and does not constitute investment advice.)
(Source: Securities Daily)