This year's synchronized strengthening of the Renminbi exchange rate and the US Dollar Index may not represent a lasting trend.
This year, the relationship between the USD/CNY exchange rate and the US Dollar Index has shifted away from its previous negative correlation, where a strong dollar typically meant a weaker yuan and vice versa. For instance, throughout 2025, the Dollar Index depreciated by 10% while the Renminbi appreciated by 4.12%. However, from the start of this year to now, the Renminbi has appreciated by 2.98% while the Dollar Index has gained 3.39%, indicating a period of simultaneous strength for both currencies.
Factors Behind the Divergence
The recent rise of the Dollar Index above 101 is likely linked to expectations of Federal Reserve interest rate hikes. The Renminbi's strength this year stems from at least two key factors. First, there is a policy focus on rebalancing goods trade. The aim is to narrow the trade surplus by increasing imports, thereby mitigating the risk of heightened trade friction that a large surplus could provoke. Recent attempts by the EU to impose more trade barriers, citing trade imbalances with China, exemplify this risk. Furthermore, global trade price levels have risen noticeably since the US-Iran conflict, and currency appreciation can help offset some of these cost pressures.
Second, robust exports are driving the Renminbi's strength. While a strong currency is often seen as a headwind for exports, the relationship in China over the past decade suggests a positive correlation: strong exports lead to a strong currency, and weak exports lead to a weak currency. This year serves as a prime example. For the first five months, China's exports grew by 15.5% year-on-year, which is 9.6 percentage points higher than the same period last year. Consequently, the Renminbi's appreciation in the first half of this year was 1 percentage point greater than in the first half of last year.
Potential Scenarios for Re-coupling
The first possibility for ending the current decoupling between the Renminbi and the Dollar Index would be a significant slowdown in China's export growth during the second half of the year. However, given the current boom in global AI hardware trade and high-frequency data such as China's export container shipping index and port cargo throughput, there is little immediate risk of a sharp export deceleration.
The second possibility involves the Federal Reserve implementing rate hikes in the second half of the year, which would likely push the Dollar Index even higher and further widen the negative interest rate differential between China and the US. In fact, prior to the Fed's June policy meeting, the Renminbi had appreciated by 3.25% year-to-date. Following the meeting, as the Dollar Index broke above 101, the Renminbi's appreciation narrowed to 2.98%.
Concluding Assessment
In summary, at this stage, the decoupling of the Renminbi exchange rate from the US Dollar Index may not be a sustained phenomenon. The US dollar's recent pronounced appreciation is expected to exert pressure on the Renminbi. After all, with domestic demand remaining relatively weak this year, a sustained, trend-like divergence between the two would require stronger fundamental support from the Chinese economy.
Key Industry Data Snapshot
The latest data on operational rates showed a mixed picture, with 5 indicators rising month-on-month, 1 remaining flat, and 7 declining.
Capacity utilization trends weakened, with 3 indicators rising, none unchanged, and 6 falling on a monthly basis.
Production levels held steady, with the count of indicators showing monthly increases, stability, and decreases remaining unchanged from the prior period.
Price trends for key commodities weakened, with only 3 indicators rising, 3 flat, and 13 declining compared to the previous week.
Other Economic Indicators
In the property market, weekly transaction area for commercial housing in 30 major cities increased, while land transaction area and premium rates declined. Second-hand home listing prices saw a slight dip overall, with variations across city tiers, and listing volumes decreased significantly.
Travel and logistics data showed a weekly increase in subway passenger volume and key shipping freight indices. However, railway freight volume, highway truck traffic, port cargo throughput, and postal parcel collection volume all experienced weekly declines.
Comments