Impact of Strong Dollar and Federal Reserve Expectations
The recent strengthening of the dollar index is one of the main reasons for the devaluation of the renminbi. Although the Federal Reserve has entered a rate-cutting cycle, the market's expectations for rate cuts have significantly decreased due to the impediment in the inflation slowdown process in the US. Particularly, both Trump and his appointed Treasury Secretary, Benson, support a "strong dollar" strategy, which has bolstered the dollar's exchange rate. The US government does not wish for a weaker dollar, and policies such as tariff increases may escalate inflation. Consequently, the expectations of US rate cuts have been postponed, naturally leading to an increase in the dollar's exchange rate and thus exerting devaluation pressure on the renminbi.
Intensified Economic Pressure in the Eurozone Boosts the Dollar
In addition, heightened financial instability in the Eurozone is also driving the dollar up. The European Central Bank warns that the sovereign debt risk of Eurozone countries is on the rise, possibly leading to a new debt crisis. Recently considered a "safe asset," French government bond yields have surpassed those of Greece, indicating an increased risk perception of the Eurozone by the market, causing the euro to sharply devalue and thereby boosting the dollar index. The political and fiscal instability in the Eurozone, combined with stubborn inflation trends, has exacerbated the euro's weak situation.
Uncertainty in Trade Policies and Renminbi Devaluation Expectations
After Trump took office, the uncertainty of foreign trade policies led the market to generally expect that China might mitigate external shocks by expanding domestic demand. This policy expectation could lead to a larger fiscal deficit and increased debt issuance to promote investment and consumption. Consequently, market expectations for China's monetary policy have shifted, especially in the context of a deepening US-China interest rate inversion, where some capital outflow might increase the devaluation pressure on the renminbi. In the short term, the fluctuations in the renminbi's exchange rate reflect the market's complex expectations regarding US economic policies and the international trade environment.
Exchange Rate Fluctuations of the Renminbi and Market Trading Psychology
It is worth noting that the current fluctuations in the renminbi exchange rate are mainly determined by market trading rather than direct government intervention. Cyclical changes in the renminbi exchange rate are primarily affected by changes in US-China relations. Although US tariff threats and trade policies have a certain impact on China's exports, these factors have not significantly influenced China's international balance of payments. Past experiences have shown that the market is more focused on trading expectations rather than actual policy interventions. The influence of the US in global trade is gradually declining, hence the potential impact of renminbi devaluation has become limited.
China's Macro Policies Stabilize the Economy, Supporting Renminbi Stability
In this context, the macro policies implemented by China in the fourth quarter have had a positive impact on market expectations and helped stabilize economic growth. The effectiveness of these policies has accelerated economic recovery, bolstered market confidence in China's economic prospects, and provided strong support for the stability of the renminbi exchange rate. Experts believe that as long as China continues to push forward economic structural reforms and stable growth, the renminbi exchange rate will maintain its long-term basic stability.
Although the renminbi is facing short-term depreciation pressure, in the long run, changes in the global economic landscape and the effectiveness of China's macro policies will support the basic stability of the renminbi exchange rate. Market fluctuations are primarily influenced by the international economic and policy environment, while China's own trend of economic recovery and improvement provides fundamental assurance for the renminbi exchange rate.
