On Thursday, China’s central bank (PBOC) took decisive action to halt the yuan’s slide, after the currency dropped to its lowest level in two months against the U.S. dollar. The move comes amid growing market turmoil triggered by a resurgent dollar and uncertainty over the Fed’s next steps.

A Fixed Rate as a Safety Net

The People’s Bank of China set the daily reference rate at around 7.15 yuan per dollar, the largest divergence from market expectations since April. This was a clear signal: Beijing is drawing the line to prevent a deeper decline in the yuan, which weakened following Fed Chair Jerome Powell’s hawkish remarks.

Powell declined to commit to a rate cut in September, pushing the U.S. dollar to its strongest level since early June and crushing investor confidence in a near-term yuan recovery. Hedge funds began to unwind short-dollar positions, adding more pressure on the yuan and prompting a swift response from Beijing.

Yuan Rebounds as Market Calms

Following the central bank’s move, the offshore yuan rose 0.2% to 7.1991 per dollar, recovering from the previous day’s 7.2146 — the weakest since early June. Analysts say the PBOC is walking a fine line: intervening just enough to avoid panic, while still allowing some market-driven movements.

“Authorities want to avoid extreme currency volatility,” said Khoon Goh of ANZ Bank. “The fixed rate was a strategic signal — we’ll allow movement, but within limits.”

Powell Changes the Game: The Dollar Regains Control

Markets had expected the Fed to cut rates in September, but Powell shattered dovish hopes with a more aggressive tone. The Bloomberg Dollar Spot Index surged as investors quickly scaled back their bets on a 2025 rate cut.

“Markets were caught off guard by Powell’s hawkishness,” said Fiona Lim of Maybank. She added that China’s use of a sharply adjusted fix showed that currency stability remains a top priority, even as Beijing allows some room for trading flexibility.

Yuan Under Pressure Amid Inflation, Dollar Strength, and Trump’s Agenda

Beijing now balances on a tightrope, trying to support the yuan without stifling broader trade flows. Trade and inflation forecasts are weighing on central banks across Asia. Derek Holt of Scotiabank warned that the U.S. has limited room for monetary easing, especially if inflation stays high and employment remains resilient.

As pressure mounts on the Chinese currency, Hong Kong is also feeling the strain. The Hong Kong dollar has neared the lower end of its peg to the U.S. dollar, despite repeated interventions from the monetary authority — a signal that the dollar’s dominance is unsettling markets across the region.

Trade War 2.0? Trump’s Influence Is Growing Again

All of this is unfolding as U.S. President Donald Trump doubles down on protectionist trade policies. His new wave of tariffs and focus on “America First” deals is putting additional stress on Asian currencies, already burdened by rising U.S. interest rates and global economic tension.

As 2025 progresses, Asia’s monetary stability hangs by a thread — and every word out of Washington could trigger a chain reaction across global markets.

#china , #Yuan , #DigitalDollars , #Powell , #TradeWars

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