Dollar doomed in balancing act

Editorial | Mary Ma 17 Sep 2020

The greenback pulled back ahead of the Federal Reserve meeting, with its index against major currencies having fallen nearly 10 percent since March. This bodes ill for the world's largest reserve currency.

Will the dollar's bearish trend persist?

It depends. If the Fed fails to announce something concrete further to Fed chief Jerome Powell's earlier indication that it would tolerate a higher inflation target, it could press the dollar lower.

Then again, the dollar might gain some strength if Powell offers something more than mere lip service.

But I seriously doubt it since Powell has few tricks left up his sleeve after slashing interest rates literally to zero earlier on. I cannot see the Fed venturing into the sub-zero interest rate zone.

It's likely the US dollar will continue to be bearish for the foreseeable future.

No wonder, then, that the yuan has appreciated effortlessly against the greenback. As the dollar dipped against other major currencies, some capital flew in the yuan's direction and resulted in the largest quarterly gain for the yuan - over 4 percent - since 1981.

The rally has been eye-popping. In previous years, the People's Bank of China would have already intervened to rein in the surge with its daily-fixing tool.

It's curious that Beijing, besides doing nothing to check the rise, appears to be taking comfort in seeing the yuan ascend.

The surge may be readily attributed to the country's success in controlling the pandemic at home and the dollar's falling of its own volition, partly due to political instability ahead of the US presidential election in November.

As it is the growing consensus that the greenback will continue to be bearish for a while, it is also in Beijing's interest to see the yuan strengthen at a time when the leadership is keen to stimulate the economy through increased domestic consumption in what is officially known as the "dual circulation" strategy.

A stronger yuan not only cheapens imports but also increases people's purchasing power.

In the midst of escalating conflicts with the US, policymakers in Beijing want to reduce the country's dependence on the dollar in foreign trades.

It's predictable that it will ask its trading partners on its "belt and road" to increase the use of the yuan in trading as it continues to internationalize the currency.

Given China's economic size, it is only a matter of time before the yuan is viewed seriously as a global currency.

Morgan Stanley, which has a vast stake in the Chinese market, was optimistic in a recent report that the yuan would become the world's third-largest reserve currency after the dollar and euro by 2030. That is very probable.

As far as Hong Kong is concerned, a stronger yuan could lead to higher living costs for the general public.

But it could also mean a return of big spenders from the mainland once the border reopens and Beijing eases its policy to let mainlanders travel to the SAR in large numbers again.

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