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RMB's fluctuation amidst expectations of a U.S. interest rate hike

Reporter: Chen Tong 丨 CCTV.com

06-02-2016 00:24 BJT

Chinese curreny rebounded in late trade Wednesday against the green back after China's central bank softened the RMB's midpoint to a five-year low. Analysts attribute the fluctuation to the expectation of a U.S. interest rate hike.

The People's Bank of China set the Renminbi's midpoint rate at 6.5889 per dollar on Wednesday, softened by 99 basis points from the previous day and putting it down 1.6 percent since the beginning of May. Wan Zhao of China Merchants Bank, says the apparent slide is really the result of the rise in the U.S. dollar index that began last month.

"The relationship between the RMB and the dollar is that as the dollar strengthens, the RMB goes down. If the dollar goes up, the midpoint rate of the RMB will go down. So the depreciation in the RMB is caused by the strengthening dollar. As the RMB midpoint rate is based on a basket of currencies, its value passively fluctuates according to the basket's value against the rising dollar," said Wan Zhao, senior analyst China Merchants Bank.

Last Friday, Fed Chair Janet Yellen said that a U.S. interest rate increase in the next few months "would be appropriate", and Wan expects that to happen in July or September. He says that although a strengthening dollar would put pressure on the RMB, it would not last long as he expects the dollar will weaken after an interest rate rise.

"The Federal Reserve is ready to increase the interest rate. It's unlikely to increase in June, but very possibly will do that either in July or September. Looking at the currency trend, the dollar will go up and the RMB will go down before the Fed's rate increase. But once the interest rate is fixed, the dollar will drop from a high point and the pressure on the RMB will ease," he said.

The RMB's fall against the dollar in May was the largest in nine months. Last week an international newspaper claimed that as a result of the decline, China's central bank has decided to scrap market-based reform in favour of exchange rate stability. The PBOC immediately denied that claim, saying it has an "unceasing commitment to the direction of market reform and increasing the exchange rate's bidirectional flexibility."


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