Dollar bears take heed: Asian central banks may be putting the brakes on the greenback’s slide. After working for three years to staunch the yuan’s slump, China is now moving to combat the opposite problem. The People’s Bank of China has stopped using a component of its daily fixing formula that had been widely interpreted as a tool to support the currency, people familiar with the matter said. The yuan sank on the news.
Meanwhile, South Korea’s government has been warning about the ascent in the won, Asia’s best-performing currency in 2017. And Taiwan’s central bank also sought to curb gains in its dollar.
With emerging-market currencies adding to last year’s rally, Asia’s exporting nations are fretting about the repercussions for their economies. The authorities’ efforts, on top of expectations for US rate hikes, could spoil calls for the dollar to weaken further after a rout in 2017. The Bloomberg dollar index gained for a second straight day.
“The PBOC adjustment to the fixing boosted the dollar and combines with other forces, like higher US rates and inflation expectations, working to put a floor under the dollar,” said Ben Emons, chief economist at Intellectus Partners.
While the latest step by the PBOC effectively means it has reduced control over the yuan’s moves by removing the counter-cyclical factor, the fact that the currency slumped the most since October wasn’t lost on market participants.
For Societe Generale strategist Kit Juckes, the move is reminiscent of September, when the PBOC effectively removed a reserve requirement for trading currency forwards, a shift seen as aimed at slowing yuan gains. The dollar rose the following four weeks, rebounding from its weakest levels since 2015, while US yields climbed from the year’s lowest levels.
“Chinese policy matters more for global markets than it used to, and Chinese policy moves tend to be decided rather faster than those in the US or Europe,” Juckes wrote in a note. Money has been pouring into emerging markets.