U.S. Dollar Notches 16-Month High as Yuan Approaches Critical Level

The U.S. dollar notched yearly highs against a basket of currencies Wednesday, as rising bond yields boosted demand for the greenback against a backdrop of global economic uncertainty. China’s yuan renminbi approached a politically sensitive level against the dollar ahead of high-profile trade talks next month.

Dollar Pushes Higher

The U.S. dollar index (DXY), a measure of the greenback’s strength against a basket of six currencies, rose 0.2% to 97.15 on Wednesday. That’s the highest level since June 2017.

Over the course of the month the dollar has added a solid 1.8% against its main competitors. Its performance overcame a volatile mix of declining risk sentiment, global growth woes and concerns that interest rates are rising too fast.

The dollar has remained attractive even as investors poured into gold and other precious metals to safeguard against a violent plunge in stock prices. For U.S. stocks, October is shaping up to be the worst month since the financial crisis. Chinese equity markets have experienced a bigger purge, with the benchmark Shanghai Composite Index down 23% year-to-date.

Rising bond yields will likely keep the dollar elevated for the rest of the calendar year. Markets are pricing in a fourth interest rate increase in December when the Federal Reserve meets for the final time this year. The Fed has maintained a hawkish outlook that has been reinforced by above-trend GDP growth, rising wages and a tight labor market.

A weaker euro and British pound have also factored into the dollar’s monthlong rally. The euro has suffered under the weight of an Italian budget crisis and recent data showing a sharp slowdown in economic growth. The Eurozone economy expanded just 0.2% in the last quarter, the slowest in four years.

Concerns over a ‘No Deal’ Brexit have weighed heavily on the pound with investors demanding protection against a more protracted slump. According to the latest options data, investors are bidding against Sterling over fears that the currency will decline more heavily in the final two months of the year.

The EUR/USD exchange rate currently resides at 1.1314, down 0.3% from Tuesday’s close. Cable (GBP/USD) has rebounded 0.3% to 1.2744.

Yuan Crumbles

China’s yuan renminbi is trading at ten-year lows against the dollar, as trade risks continue to loom large for the world’s largest economy. On Wednesday, the USD/CNY exchange rate added 0.1% to 6.9744, putting it within reach of a politically significant threshold.

While Beijing has promised to avoid devaluing the yuan for competitive purposes, the latest slide will only add to the Trump administration’s suspicion that Chinese officials are manipulating their currency. The U.S. Treasury until now has held off on labelling China a currency manipulator, but its criticisms of Beijing’s yuan policy are well known.
Since Oct. 5, the U.S. dollar has strengthened 1.5% against the yuan.

U.S. President Donald Trump and Chinese counterpart Xi Jinping will attempt to diffuse trade tensions next month in a high-profile meeting on the sidelines of the G20 Summit in Buenos Aires, Argentina. Although President Trump has high hopes for the summit, he has threatened to tax all Chinese imports if no trade deal is reached.

Featured image courtesy of Shutterstock.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi