USD/CNH declines towards 33-month low to near 6.9310 as Yuan gains on seasonal demand

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The USD/CNH pair trades lower to 6.9350 during the late Asian trading session on Tuesday. The pair declines towards its 33-month low of 6.9310 as the Chinese Yuan (CNH) continues to outperform the US Dollar (USD) due to strong seasonal demand.

USD/CNH approaches the 33-month low to near 6.9310 as Chinese Yuan capitalizes on seasonality.
The US Dollar faces slight selling pressure due to partial US government shutdown.
Kevin Warsh’s nomination for Fed Chairman and upbeat US ISM Manufacturing PMI have strengthened the US Dollar.

According to a note from China’s Ping An Bank, the upcoming spring festival holiday, combined with a weak dollar trend and seasonal demand for currency settlement, are continuing to support the yuan, Reuters reported.

Though investors have underpinned the Chinese Yuan against the US Dollar (USD) due to seasonality trend, the latter has broadly turned strong against its major currency peers, following the nomination of former Federal Reserve (Fed) governor Kevin Warsh as the successor of Chairman Jerome Powell.

As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, drops slightly lower to near 97.45, but is still close to its weekly high of 97.73.

The US Dollar has retraced marginally due to partial US federal shutdown, which will result in the suspension of key economic data releases.

On Monday, upbeat US ISM Manufacturing Purchasing Managers’ Index (PMI) data for January also supported the US Dollar. The ISM reported that the Manufacturing PMI returned to growth after declining for several months. The data came in at 52.6, higher than estimates of 48.5 and the prior release of 47.9. A figure above 50.00 is seen as an expansion in the business activity.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.