The US dollar has continued its downward spiral against the Chinese yuan, as the extra-large Covid-19 stimulus is driving inflation and causing a depreciation in the global reserve currency. The greenback dropped on Monday to a three-year low versus the yuan.
The decline was accelerated by the flight of global investors who seek safer assets. China appears to have come around the corner after being initially hit hard with the coronavirus pandemic, and its economy is now showing signs of significant bounce back.
Overheating Chinese Currency
The offshore yuan was traded at 6.3741 against the dollar, receding from the overnight high of 6.3553. The onshore yuan traded at 6.2418 even as Chinese authorities tried to pour cold water on the overheating currency.
The dollar also came under pressure against the euro and the pound, and was seen hitting its second consecutive monthly loss against them both.
The greenback's losses were predictable as data showed on Friday that US inflation hit a 29-year high. Forex speculators also raised their bets against the greenback as the US dollar short positions rose to 2-1/2 month high.
PCE Price Index
In the US, the PCE price index, which is used to understand the extent of inflation across a wide range of consumer expenses, rose more than 3 percent, the largest annual spike since 1992, even as the country shook off supply disruptions and pandemic impact.
The US dollar is on track for its second consecutive month of loss against a basket of currencies. The offshore yuan was trading at 6.3553 per dollar, its strongest level since May 2018, despite analysts' warnings that the Chinese authorities aim to curb its rise.
However, the current inflation levels seem to transitional, said Ulrich Leuchtmann, Commerzbank's head of FX and commodity research. He says the US inflation will remain at 2.5 percent next year.
"That does not make it any easier pricing USD ... Until we have more clarity the dollar is likely to have found a good balance at current levels," ," Leuchtmann added, according to Reuters.
Meanwhile, Chinese state media last week ratcheted up rhetoric on the global dollar dominance petering out.
"There are numerous data that suggest that the status of the US dollar as a reserve currency around the world is being weakened by the euro, Japan's yen and China's yuan. The deadly COVID-19 pandemic also intensified the decline of US dollar hegemony," China government mouthpiece Global Times said.
Dollar Reserves Decline Overall Globally
The article explains, citing IMF data, that the share of dollar reserves have declined overall globally in the recent years. While euro reserves held by global central banks were at 21 percent in Q4 2020, the share of US dollar dropped to 59 percent, which was the lowest level in 25 years.
The article also charges that the US stimulus is exasperating the coronavirus-caused economic hardships around the world, especially in the middle income countries.
The 'unrestrained borrowing' by the US government have directly the soaring prices of international commodities, especially copper, aluminum and iron ore, it says.
The increasing cost of raw materials is mounting more pressure on the living standards of the low to middle-income people, it says, adding that the rising commodity prices is caused by the excessive dollar stimulus, and that it has already increased manufacturing costs around the world.
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