The U.S. dollar fell versus Japanese Yen. What about Yuan?

The U.S. dollar traded mostly in the red on Monday. It began today’s session higher after closing at 106.05 on Friday. Despite that, the dollar index tumbled by 0.76% to 105.53 during the day. The currency plunged sharply versus the Japanese yen, shaving off 0.69% to 138.18 yen. Moreover, it collapsed to 137.57 earlier in the session, hitting its lowest level since August 26.

The greenback also fell against the common currency. The Euro surged forward by 0.69% to $1.048, exchanging hands near its highest level since late June. Traders are waiting for Fed Chair Jerome Powell to speak on the U.S. economy’s outlook. On Wednesday, he will also review the labor market at a Brookings Institution event. Powell’s speech might also provide more clues about the agency’s plans for hiking U.S. interest rates.

Meanwhile, the onshore Chinese yuan dropped by 0.5% at 7.199 per USD, hitting the lowest level since November 10. In Asian trading, the offshore yuan also plunged to a more than two-week low. It traded lower by 0.28% at 7.214 at last.

China was in turmoil due to protests that flared across the country after an apartment fire killed ten people in the city of Urumqi. On Sunday night, police clashed with hundreds of demonstrators in Shanghai.

Consequently, the Chinese yuan declined by 0.4% on Monday, reaching its lowest level since October 11. Global stocks also tumbled as analysts and investors worried about the situation in the country. The Chinese economy has already suffered due to its harsh coronavirus restrictions. The government has implemented various measures to bolster growth, but it’s now working very effectively. According to analysts at Barclays, China’s economic growth in 2022 will likely drop to 3.3% from last year’s 8.1%.

What are the Chinese central bank’s plans for the near future?

The People’s Bank of China stated on Friday that it planned to cut the reserve requirement ratio (RRR) for banks by 25 basis points. This will become effective from December 5. Iris Pang, the chief economist for Greater China at ING, also noted that companies have to contend with weaker retail sales in the country. Surging COVID-19 cases are putting a damper on businesses. In addition, home prices are dropping due to unfinished home projects.

Chris Weston, the head of research at Pepperstone, thinks that markets are currently waiting for the government’s response to the protests. However, it’s unpredictable. So, investors prefer to stay safe and buy risk-off currencies. On Monday, the risk-sensitive Australian dollar plummeted by 0.67% to $0.671.

However, considering the sentiment, the dollar’s decline was confusing, as Chris Turner, the head of market research at ING, pointed out. He said that with the uncertainty about the Chinese situation, it’s understandable why the Japanese Yen is soaring. On the other hand, the safe-haven greenback’s drop doesn’t make sense. Stephen Gallo, the European head of FX strategy at BMO Capital Markets, thinks that a drop in U.S. bond yields makes the greenback less attractive than the Japanese currency.

Still, the dollar has been decreasing over the past few weeks. Investors thought that the Fed would slow its rate hikes soon. Minutes of the agency’s November meeting supported this view.

How are the EM currencies faring?

Asian EM markets experienced a sell-off on Monday. The South Korean won struggled the most, with protests in China weighing on the currency. Overall, the won plunged by 1.1% today, breaking its three-day winning streak. At the same time, the Taiwan and Singapore dollars shaved off 0.2% each. Meantime, the Philippine peso declined slightly.

The Indonesian rupiah ended in the deeper red, though. It tumbled by 0.4%, suffering its biggest percentage loss since November 16. The protests in China damaged risk sentiment, bolstering uncertainty – noted Khoon Goh, the head of Asia research at Australia and New Zealand Banking Group. He added that this would continue to drive Asian markets in the near term until traders see how the situation evolves.

Unlike other EM currencies, Thailand’s baht rallied today. It surged forward by 0.2%, even though stocks decreased by 0.2%. Traders are looking out for the country’s central bank’s decision on interest rate hikes. They expect the Bank of Thailand to increase interest rates modestly for a third straight meeting. The government spoke about fragile tourism-reliant growth. But there are also signs that inflation has started to ease.

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