Yuan Slumps as Trade War Rattles Markets
The Chinese yuan plunged on Wednesday as tensions between the United States and China escalated, while the Japanese yen surged amid expectations of further interest rate hikes by the Bank of Japan (BOJ).
Yuan Under Pressure
The yuan tumbled more than 0.5% against the dollar, reaching a high of 7.2856 after Chinese markets reopened from the Lunar New Year holiday. This occurred despite the People's Bank of China setting a stronger-than-expected midpoint rate for the currency.
Analysts believe that China may allow for a weaker yuan to mitigate the impact of US tariffs. Carol Kong of Commonwealth Bank of Australia predicts that "allowing the yuan to weaken will be one of the responses China takes."
Yen Strengthens
The Japanese yen rose over 0.5% to its strongest level in over a month, driven by data showing an increase in real wages. This has led traders to bet on more BOJ rate hikes this year.
Alvin Tan of RBC Capital Markets notes that "the upcoming spring wage rounds will be closely watched, as expectations grow of more BOJ tightening."
Broader Market Jitters Subside
Overall, currency volatility has eased after a turbulent start to the week caused by President Trump's imposition of tariffs on key US trading partners. The euro and other battered currencies have rebounded slightly, providing some respite from the recent sell-off.
The Canadian dollar has recovered from its 22-year low and the Mexican peso has stabilized, moving away from its weakest level in nearly three years. Sterling and the US dollar index have also seen modest gains.
Despite the trade war escalation, markets have shown resilience, with risk sentiment remaining relatively positive. Analysts attribute this optimism to the willingness of the US to delay tariffs and the possibility of further negotiations.