China’s currency sank to a six-year low against the dollar Thursday as Donald Trump prepares to enter the White House.
The Chinese yuan (renminbi) recently dropped to 6.82 yuan per dollar, putting China’s currency at its weakest since Sept. 2010, reports CNN Money.
The dollar rallied after initial instability. U.S. treasury yields rose Wednesday night on expectations that Donald Trump and his new administration will boost growth through greater fiscal stimulus, giving investors confidence in the dollar, CNBC revealed.
“We believe the outcome of a Republican clean sweep means fiscal loosening is now a foregone conclusion. We believe this will lead to both higher rates and a higher dollar,” analysts at Bank of America and Merrill Lynch said in a note, according to CNBC.
While there are certain external factors in play, the latest devaluation of China’s currency signals China may be responding to Trump, who has been highly critical of China’s economic practices.
Letting the value of the yuan drop protects China’s exports and gives China a competitive advantage, but China is hesitant to let its currency devaluation occur too quickly, which could spark greater punitive actions on the part of the new Trump administration and undesirable capital outflow.
Calling out the Chinese for “raping this country,” Trump has threatened to place sweeping 45 percent tariffs on Chinese exports and label China a currency manipulator. The Commonwealth Bank of Australia estimates that such punitive actions could cut Chinese shipments to the U.S. by 25 percent.
“There’s speculation that he could add punitive measures that hurt China’s exports, and also he may favor higher U.S. interest rates,” Nathan Chow, a strategic economist at DBS Group Holdings Ltd. in Hong Kong, explained to Bloomberg News, “The yuan may be pressured by Trump’s win.”
“Trump has made his stance quite clear about China and it is definitely not a friendly outcome in terms of bilateral trade relations,” said Christy Tan, head of markets strategy in Hong Kong at National Australia Bank Ltd., told reporters.
Observers say there is a good chance that Trump will follow through on his plans to label China a currency manipulator early on his first term. Trump himself said that he would direct his Secretary of the Treasury to label China a currency manipulator within his first 100 days in office.
“I place great importance on the China-U.S. relationship, and look forward to working with you to uphold the principles of non-conflict, non-confrontation, mutual respect and win-win cooperation,” China’s president Xi said to Trump Wednesday.
Some observers expect the yuan to continue to slide. China’s yuan may slip to 7 yuan for every one U.S. dollar, Bart Wakabayashi, head of Hong Kong foreign-exchange sales at State Street Global Markets, explained to the Wall Street Journal.
There is, however, the possibility that the Japanese Yen and the Euro, the two other currencies that China tracks, will take up a larger share in the People’s Bank of China’s currency basket, which could lead to the strengthening of the yuan, JP Morgan told CNBC reporters.
As China’s currency shifts, market observers will be watching carefully to see whether or not Trump puts pressure on China.
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