Yuan hits historic low against dollar as US-China tariffs bite harder

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Escalating trade tensions point to the ongoing trade conflict between the United States and China, which has intensified, with both nations imposing additional tariffs on each other's imports.

This escalation has heightened economic uncertainty and exerted downward pressure on the yuan.

The Central Bank's policy adjustments are also contributing to this depreciation. The People's Bank of China (PBOC) has adjusted its currency management approach by setting the daily reference rate at 7.2038 yuan per dollar, the first breach of the 7.20 threshold since September 2023. This move indicates a possible strategic shift to allow a weaker yuan, potentially to enhance the competitiveness of Chinese exports.

The depreciation has sparked market speculation about a potential larger devaluation of the yuan. However, significant devaluation could lead to capital outflows and financial instability, factors that Chinese authorities are likely considering in their currency management decisions.

A weaker yuan can make Chinese exports more competitively priced internationally, potentially offsetting some negative impacts of US tariffs. However, it also raises concerns about capital flight and may strain international relations, particularly with the United States, which has previously criticised China for alleged currency manipulation.