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Yuan Reaches New Low as Slowdown and Tariffs Bite; 7.0 to the Dollar Likely Next Year

Friday saw the Chinese yuan strike a 21-month low against the dollar of 6.941. A move to and perhaps through 7.0 to the dollar, which remains a symbolic level for many, now seems likely within the next year.

Posted Oct 20, 2018

A number of important economic developments in 2018 have worked to reduce demand for Chinese goods and investments, and therefore demand for the yuan.

The yuan’s sharp decline, which amounts to nearly 10 percent since April, began at the end of the first quarter and coincided with a realization globally that Donald Trump was serious about US trade protectionism. In early March, Trump’s administration proposed tariffs on steel and aluminium imports, and these were followed three weeks later by massive China-only tariffs. Tariffs make Chinese products more expensive to American buyers, which lessens their appeal and necessitates a weaker yuan.

Consider also the effect that China’s slumping stock market is having on its currency. The Shanghai Composite index continues to plumb new depths—it is now down 25 percent year-to-date, versus gains in US indices—and investors, therefore, no longer want to buy into Chinese companies and have one less reason to exchange local currency into yuan.

Finally, validating recent speculation that China’s economy is slowing down was Friday’s official third-quarter data, which showed annual GDP growth at a 9-year low of 6.5 percent.

Will 7.0 to the dollar—a level unseen since 2008—be realized, and if so, when? The majority of FX traders polled by Bloomberg this month believe it will, but not until 2019.

Such is the size of China’s economy that the ramifications of a weaker yuan for global markets are significant and far reaching. Of special interest to BestExchangeRates readers will be the undoubted knock-on effects on other Asian currencies, especially those from countries running significant current account deficits, such as the Philippines, Indonesia and India. The currencies of such nations would slide on further yuan weakness to fresh multi-decade lows.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.