The Malaysian Reserve

PBoC joins forces with Powell on dollar rally

By BLOOMBERG

NEW YORK • The People’s Bank of China (PBoC) and US Federal Reserve (Fed) delivered a one-two punch to the dollar last Friday, spurring the biggest sell-off in a month and raising the spectre of further weakness ahead.

The PBoC announced that banks would resume using the “counter-cyclical” factor when calculating the yuan’s daily reference rate, restraining the influence of market forces that have been driving the currency lower versus the greenback.

Roughly three hours later, Fed chairman Jerome Powell gave foreign-exchange traders another reason to sell the dollar, saying he sees little sign of inflation accelerating above the central bank’s 2% target.

China’s fixing adjustment in tandem with Powell’s dovish tone on price pressures fuelled a decline of as much as 0.7% for the greenback last Friday.

The PBoC’s move to inject stability into the dollar-yuan rate will reverberate across the emerging-market (EM) currency landscape, slowing further greenback gains, according to Brad Bechtel, an MD at Jefferies Group LLC.

“Any dollar-yuan rallies will be a lot less punchy and a lot more gradual, so it will have a dampening effect,” Bechtel said. “It provides stability to the entire Asian-EM complex. It does help cap the rally in the dollar, or at least stall it.”

The yuan has slid more than 6% against the greenback since mid-June as the two countries square off in a protracted trade war, helping fuel broad dollar gains and stoking the ire of US President Donald Trump.