FOREX REVIEW: a volatile week

The renminbi has ended a volatile week weaker against the US dollar despite briefly reaching its strongest level in more than three years, as expectations of further Federal Reserve rate increases revived demand for the dollar. Onshore USD/CNY closed at 6.7133 on September 25, up from 6.6977 a week earlier, meaning the RMB weakened by 0.0156 yuan, or 0.23%. Offshore USD/CNH rose more sharply, from 6.6954 to 6.7230, a 0.41% RMB decline. The reversal matters because it has shown that even as Beijing becomes more comfortable with currency appreciation, global interest-rate expectations can still overpower domestic policy signals.

The People’s Bank of China has nevertheless sent its clearest signal in months that it is prepared to tolerate a stronger currency. Its USD/CNY fixing strengthened from 6.7521 on September 18 to 6.7487 on Monday, the strongest since February 2023. This marked a relaxation of nearly a year of fixings designed to restrain RMB appreciation, with USD/CNY touching 6.6950 on Monday. The move suggested policymakers were prioritizing exchange-rate stability around President Xi Jinping’s Washington summit with US President Donald Trump rather than seeking additional export support from a weaker currency.

The RMB has performed more strongly against several other major currencies. EUR/CNY fell from 7.6930 to 7.6474, meaning the RMB gained about 0.59% against the euro, while GBP/CNY dropped from 8.9715 to 8.8967, an RMB gain of roughly 0.83%. The Australian dollar weakened more sharply, with AUD/CNY falling from 4.7718 to 4.7150, leaving the RMB about 1.19% stronger. These moves underline that the week’s late RMB weakness has primarily reflected renewed US dollar strength rather than a broad loss of confidence in China’s currency.

External developments have dominated sentiment. The dollar reached a two-month high on Thursday as strong US data and hawkish Federal Reserve commentary increased expectations of further rate increases. Meanwhile, the Trump-Xi summit produced an extension of the US-China trade truce but few major economic breakthroughs, limiting any lasting currency boost from improved bilateral sentiment.

The week’s movements therefore point to a PBOC increasingly willing to allow gradual RMB strength, but not necessarily prepared to engineer it against powerful global forces. With US interest-rate expectations again driving the dollar, investors will be watching whether the PBOC continues allowing stronger fixings and whether details emerging from the extended US-China trade talks alter expectations for Chinese exports and capital flows.