Yuan Rallies with Risk Assets as Trump Softens Tariff Threats

The Chinese yuan surged alongside assets linked to China's economy, buoyed by indications that President Donald Trump is scaling back threats of higher tariffs on Chinese exports.

In a Fox News interview, Trump expressed a preference for avoiding tariffs against China, the world's second-largest economy. This sparked gains in the Chinese currency, which reached its highest level in six weeks in both domestic and overseas trading. The Australian and New Zealand dollars also rose by over 0.5%, while U.S. Treasury yields declined.

The Hang Seng China Enterprises Index jumped more than 2%, reflecting optimism in the equity market. Despite Trump's rhetoric, investors have focused primarily on his actions regarding trade. His first days in office did not bring the sweeping tariffs he promised during his campaign.

As a result, the dollar has weakened, while the yuan has strengthened. Traders perceive the proposed 10% tariff on Chinese exports as less severe than the previously discussed 60%.

"Trump continues to adopt a more conciliatory approach towards China," said Fiona Lim, senior strategist at Malayan Banking Bhd. "Markets are likely to reduce their expectations of tariffs at this time."

Trump's softer tone provides relief for the People's Bank of China (PBOC), which has implemented a range of measures to support the falling yuan. However, analysts caution that volatility persists due to the unpredictability of Trump's policies.

He recently threatened tariffs on Mexico and Canada in February. Chinese assets also face pressure from concerns about a prolonged economic slowdown and a widening interest rate differential with the U.S.

"Trump's recent change in stance may be strategic, foreshadowing more aggressive actions in the future," said Wei Li, head of multi-asset investments at BNP Paribas Securities (China). "Although his rhetoric suggests an easing of tensions, the threat of significant tariffs remains."

The yuan gained approximately 0.4%, trading just below 7.26 per dollar both domestically and offshore. A Bloomberg gauge of the U.S. dollar declined by 0.3%.

Alvin Tan, strategist at RBC Capital Markets, anticipates ongoing volatility. "Negotiations between the U.S. and China may not yield success," he said. "It's still early days, and Trump is unpredictable. However, it does appear that US-China trade policy is entering a new phase of negotiations."