Commodity prices remained under pressure from worries about growth slowing in China.
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“The combined drop is the biggest since China set up its modern foreign exchange system in 1994″, when it devalued the yuan by 33% at a stroke. Initiatives by Japan and the European Union over the past two years depressed the yen and euro. They continue to expect the Fed to raise rates at its September meeting.
Additionally, in contrast to the yuan’s relative strength, Brazil’s real has shed around 60 percent against the U.S. dollar since 2011, while Turkey’s lira has lost 50 percent and all other Asian currencies, with the exception of the Hong Kong dollar, have all been weak over the past year, he noted.
The head of the Banking and Finance department of the the University 0f Ghana Business School, Dr. Godfred Bokpin, in exclusive interview with Pulse.com.gh, said, a country will devalue its currency for many strategic economic reasons. The yuan had strengthened in tandem with the dollar, hurting Chinese exporters and imperiling jobs in manufacturing industries that employ tens of millions of workers.
Tuesday’s move “signals a new government willingness” to let the currency decline, said USB economist Tao Wang in a report.
The yuan’s weakness adds an extra risk to local companies already struggling with falling profits.
The PBOC also announced it would enhance the flexibility of RMB exchange rate in both directions and keep the exchange rate basically stable at an “adaptive and equilibrium level“, enabling the market rate to play its role, and improving the managed floating exchange rate regime based on market demand and supply.
This sudden change of course is not typical of Chinese central planners.
The People’s Bank of China intervened in the interbank market for a second time this week on Wednesday, pumping in 110 billion yuan through open market operations to steady interbank rates that have been shooting up as investors pull out of the yuan. The deputy central bank governor said that there are no basis for persistent and substantial devaluation.
“But the yuan’s rise will not be as significant as it was before”, Ding said.
The centre of Tuesday’s trading band was set 1.9 per cent below Monday’s level.
The Hyundai Research Institute estimates that if the yuan falls 5 percent against the won, Korea’s volume of exports will decline 3 percent.
China’s move last week to allow the yuan to shed value by almost 3% against the U.S. dollar is a step towards market-determined currency rates, although stability remains doubtful. In addition, according to International Monetary Fund, the yuan is on track to be included in the basket of reserve currencies that make up the Special Drawing Rights.
“After a few days of volatility, the central bank appeared to want the yuan to show some stability for now, possibly also next week”, said a trader at a major European bank in Shanghai.
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Precisely because the Chinese government kept the yuan tied to a strong dollar, the exports of other countries have become more competitive as their currencies have fallen against the yuan over the past year.
