Chinese traders have lost interest in the dollar. What does this mean for the yuan exchange rate?

Traders in China are reducing demand for the dollar, which is helping to alleviate the currency shortage that previously strained the banking system. This paves the way for further strengthening of the yuan.

The difference between the current and forecast rate of the dollar against the yuan in transactions for a year ahead has shrunk by a quarter in 2025. The point is that investment divisions of China's state banks have gradually shifted from actively buying U.S. currency to reducing demand for it, and then to bringing it to the market, traders who wished to remain anonymous told Bloomberg.

The reduction of this "premium" means both weakening demand for the dollar and growing optimism about the potential of yuan strengthening, explained to the agency chief economist of Guotai Junan Hong Kong Hao Zhou. In his opinion, positive macro statistics from China, which lowered expectations of Beijing's imminent reduction of interest rates, could also support the yuan on the forward foreign exchange market.

Since the beginning of 2025, the dollar has decreased in value against the yuan by almost 2%. Analysts expect the Chinese currency to continue to gain ground against the U.S. currency. Citigroup estimates that in the coming months, the difference between the current and forecast dollar-yuan exchange rate in currency swaps for the year ahead will narrow from the current -1866 to -1500 points (a smaller negative value indicates a strengthening of expectations for the yuan versus the dollar). Такой уровень рынок последний раз видел в начале 2023 года, отмечает Bloomberg.

Currency swaps - an agreement to buy currency now and sell it in the future - have become widespread in China's financial system, where strict currency controls limit what banks and companies can do. These instruments are used to hedge risks and manage dollar assets needed for current operations or investment needs, explains Bloomberg. 

As a rule, the difference between the current and forecast rates narrows when expectations for interest rates in the U.S. and China converge. This is now becoming more and more likely: markets wait for a Fed rate cut as early as September, and Chinese macro statistics are improving, giving the Chinese Central Bank an excuse not to rush into additional stimulus, the agency said.

The dollar lost nearly 4% against a basket of other major currencies in the first quarter of 2025 amid dramatic policy changes by the administration of U.S. President Donald Trump - particularly in the areas of trade, security and the economy. These moves have undermined confidence in the dollar as the world's main reserve currency. The decline accelerated in the second quarter, with the dollar collapsing another 7% after the imposition of sweeping duties in early April, reports Reuters.

On the morning of July 11, the dollar index rose 0.2%. The occasion was again Trump: he published a letter saying that duties of 35% will be applied to all imports from Canada starting August 1 and added that the European Union will receive a letter of impending tariff increases in the coming hours.

This article was AI-translated and verified by a human editor