China's Yuan Devaluation Is Great News for U.S. Dollar

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Will Yuan Devaluation Truly Help China's Economy?

China’s decision to devalue the yuan is good news for dollar bulls.

China’s central bank cut the yuan’s daily-fixing rate by a record 1.9 percent Tuesday after the International Monetary Fund last week delayed a decision to endorse it as a reserve currency. The move cast doubt on the health of the world’s second-largest economy, weighing on the currencies of its trading partners and competitors. The dollar was already supported by speculation the Federal Reserve will increase interest-rates as early as next month.

“The dollar story continues to look in almost splendid isolation compared to pretty much everywhere else,” said Jeremy Stretch, a foreign-exchange strategist at Canadian Imperial Bank of Commerce in London. “It just adds to the impetus” for a currency that’s rising because “the growth story is allied to the prospect of Fed tightening upcoming.”

The greenback strengthened against most of its 16 major peers. The New Zealand, Australian, Singapore and Taiwanese dollars tumbled at least 0.7 percent, along with South Korea’s won.

While the dollar has rallied versus all of its major peers in the last 12 months, the bullishness had faded. Forecasters ratcheted back expectations for gains in the dollar after a gauge of the currency fell 1.7 percent in three months ended June 30 amid weakness in the U.S. economy that few predicted. The Bloomberg Dollar Spot Index had surged 20 percent in the previous three quarters.

Reserve Status

The People’s Bank of China had kept the yuan broadly stable against the dollar since March to encourage greater global usage in a push for official reserve status at the IMF. China has been pushing for the yuan to join the dollar, euro, yen and pound in the basket of currencies that make up the fund’s Special Drawing Rights, or SDR.

A strong yuan had put pressure on China’s exports. The nation’s overseas shipments fell 8.3 percent from a year earlier in dollar terms in July, well below the estimate of a 1.5 percent decline in a Bloomberg survey.

“The gain by holding dollar-yuan very steady, in terms of its appeal for the SDR, is now outweighed by the need for a weaker exchange rate as part of looser monetary conditions,” said Sean Callow, a strategist at Westpac Banking Corp. in Sydney. “It adds to the appeal of the U.S. dollar heading into next month’s meeting.”

The Chinese central bank’s move on Tuesday was a one-time adjustment, it said in a statement, adding that it plans to keep the yuan stable at a “reasonable” level and will strengthen the market’s role in determining the fixing.

“They’re saying it’s a one-off, but I don’t think the market’s actually buying that,” said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “This might be the start of a broader change. That’s why the market is reacting so strongly.”

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