Dollar Hits Bottom, Euro Surges... Will Yuan Also Soar?

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As the possibility of a U.S. interest rate cut increases, the dollar hit its lowest level this year. Meanwhile, the euro surged in value. Additionally, there are forecasts that the relatively slower-rising Chinese yuan could also see a significant increase soon.

On the 20th (local time), the Dollar Index, which shows the value of the U.S. dollar against six major currencies, fell 0.48% from the previous day to 101.38, marking the lowest level this year. It dropped 4.5% compared to the peak at the end of June. The dollar has fallen 2.9% this month as expectations grew that the Federal Reserve (Fed) would cut interest rates next month. The last time the Fed cut rates was during the COVID-19 crisis in 2020.

Furthermore, with strong U.S. retail sales and employment data raising hopes for a soft economic landing, there are projections that interest rates could be cut up to three times this year, which has been seen as fueling the dollar's weakness. Bank of America’s Athanasios Bambakidis, Head of G10 FX Strategy, explained, “Optimism that the Fed will cut rates multiple times this year boosts risk appetite and leads to a weaker dollar trend.”

The decline in the dollar’s value has stirred European currencies. According to Bloomberg News, the euro-dollar exchange rate reached $1.1110, the highest level this year (indicating a rise in the euro’s value). The British pound-dollar rate hit $1.3052, marking the highest level since July last year.

Despite the dollar’s weakness, the Chinese yuan has only risen by about 1% this month. However, Bloomberg forecasts that if the active “yuan carry trade” (investing in overseas asset markets using low-interest yuan) unwinds due to China’s lower benchmark interest rate compared to the U.S., the yuan’s value could surge. If the dollar’s weakness continues and Chinese investors find holding dollars less attractive than deposits, major Chinese investors might start buying yuan again.

Guo Tao, Chief Global Economist at Bank of China International, said, “If people see signals that the yuan could strengthen by 3-4%, they will lose interest in profiting from the yield difference by holding dollars,” adding, “This will soon lead to the closing of carry trade positions, and this could happen quickly.”

At least for now, the future direction of the dollar’s value depends on watching the remarks of Fed Chair Jerome Powell at the Jackson Hole meeting scheduled for the 22nd.

Meanwhile, MarketWatch reported that the Fed’s September rate cut is more likely to be a baby step (0.25 percentage point cut) rather than a big cut (0.5 percentage point), and this could be the last cut of the year. In this case, there is analysis that the dollar’s weakness may not continue.

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