Renminbi Strengthens as Overseas Dollar Deposit Rates Defy Fed Cuts, Rising Instead

On December 11, the Federal Reserve announced its third rate cut of 2025, lowering the federal funds rate target range by 25 basis points to 3.50%–3.75%. However, overseas banks raised the six-month dollar deposit rate by 18 basis points, from 3.27% to 3.45%.

"After the Fed's rate cut, we paused our 13-month dollar deposit offerings and reintroduced a six-month dollar deposit product with a higher rate. This adjustment was made to protect existing clients' interests amid the renminbi's strength, which is approaching the 7-per-dollar threshold. Future dollar deposit product durations will depend on the Fed's next moves and renminbi exchange rate fluctuations," said Liu Yun, a wealth manager at a Hong Kong-based bank, on December 18.

**Rates Rise Against the Trend** Industry experts note that while overseas banks typically follow the Fed's rate cuts, this time they moved in the opposite direction.

"The Fed has cut rates by 75 basis points this year, and overseas interbank markets mirrored the first two cuts—for instance, dollar deposit rates dropped from a peak of 4.5% at the start of the year to around 3.25%. But this latest cut caught overseas banks off guard, especially after November’s delayed U.S. data releases dampened expectations for a December rate cut. The Fed’s surprise move disrupted the dollar deposit market," admitted a product development head at a Singaporean bank’s China branch.

Zeng Gang, director of the Shanghai Finance and Development Laboratory, explained that the Fed’s cumulative 75-basis-point cuts in 2025 aim to stabilize employment, prevent recession, and return policy to neutral amid controlled inflation. These measures extend 2024’s accommodative stance to support the economy. The 2026 policy path will hinge on economic data, implying greater flexibility but also potential disruptions to sustained easing, requiring close monitoring of core inflation and employment indicators.

**Investor Dilemma Amid Renminbi Strength** Previously, dollar-denominated wealth products in China offering over 3% annualized returns attracted significant investor interest. However, the renminbi’s sustained appreciation—up 3.4% year-to-date—now threatens to erase dollar deposit gains if converted back.

"Most dollar deposit clients are long-term investors, so current exchange rate impacts are negligible. But with overseas banks raising rates, investors face a choice: lock in higher yields now or wait for clearer signals on future rate and currency movements," Liu Yun noted. She advises clients to roll over maturing dollar deposits but cautions against new forex conversions until the Fed’s next decision.

**Three Key Variables Shaping the Market** Domestic foreign banks have adjusted dollar deposit rates: - STANCHART offers preferential rates of 3.8% (3-month), 3.7% (6-month and 1-year) for new priority clients. - HSBC and DBS launched 3-month products at 3.8%, up 20 basis points. - Wealth management subsidiaries like Huihua Wealth promote 182-day dollar fixed-income products with a 3.22%–3.52% benchmark.

Lin Yingqi, a banking analyst at CICC, attributes the high-rate trend to three factors: 1. Lagging transmission of Fed rate cuts to asset yields, with high-coupon bonds and interbank certificates sustaining short-term returns. 2. Quota controls to prevent profit dilution and manage forex/rate risks. 3. Strong demand for dollar assets in a low-rate global environment.

**Renminbi’s Surge and Future Risks** On December 17, the onshore renminbi hit 7.0455 per dollar, a high since October 2024, while offshore rates breached 7.05. Year-to-date, the renminbi has gained 3.4% against the dollar.

Huang Wei, a forex manager at a major Chinese joint-stock bank, identifies three critical variables: 1. Renminbi appreciation—expected to continue into 2026—could deter new dollar deposits even at 3.5%+ yields. 2. The Fed’s next moves: banks may not sustain rate hikes if the Fed cuts again. 3. Falling renminbi deposit rates in China could shift funds to dollar products, though volumes remain uncertain.

Lin Yingqi warns that for RMB-based investors, the renminbi’s 3.4% rise this year could negate a 3% dollar product’s returns after forex losses. Zeng Gang advises limiting dollar allocations to 10%–15%, favoring short-term, liquid products, and hedging tools like forwards or options.

**Outlook: Short-Term Gains, Long-Term Declines** Zeng predicts dollar deposit rates may hold at 3.5%–4% for 1–2 quarters but will likely drop to 2.5%–3.0% by 2026 as Fed cuts continue. Lin suggests diversifying currencies, using hedging instruments, and prioritizing short-duration dollar assets to mitigate risks.

In summary, while dollar deposits offer temporary high yields, investors must weigh them against renminbi strength and evolving Fed policy.