By Mike Dolan
LONDON, Feb 11 (Reuters) – The dollar is sliding again against the euro and yuan, just as European and Chinese leaders are seeking to boost the global role of their currencies, taking advantage of the rising dollar doubts. The latest exchange rate shifts seem to be playing out as desired for all parties, especially Washington.
With the Lunar New Year holidays looming, China’s offshore yuan has surged to its best levels against the dollar in almost three years. The greenback has lost 6% against the renminbi since the start of last year.
The euro’s 15% surge against the dollar over the same period is even more pronounced, as the exchange rate stalks the five-year high above $1.20 set last month.
These moves are in line with the recent jawboning by leaders in both areas.
Only last Thursday, European Central Bank sources said the ECB was planning to back up its long-standing call for a ‘global euro’ by working to extend euro liquidity to more countries, making it cheaper and easier to use euros overseas and bolstering the currency’s international role.
Then on Tuesday this week, Austria’s central bank chief Martin Kocher said the ECB must be prepared for a big shift. “We are seeing more interest in the euro by counterparts and I think that’s one of the reasons why we’re seeing some appreciation of the euro, why the euro is becoming more of a safe haven.”
Meantime, China’s president, on February 1, amid a flurry of top level trade visits and calls for an ‘equal, multipolar world’, firmly restated Beijing’s desire for a ‘powerful currency’ used more widely in global trade, finance and world reserves.
Both regions appear to sense a rethink among global investors about the dollar’s overwhelming dominance in world finance after a year of aggressive, disruptive U.S. diplomacy and trade policy – and now seems to be the moment to act.
But welcoming a weaker dollar exchange rate is one thing. The implications of a new world order in which many in the U.S. administration embrace a weaker dollar is something else. All parties should tread carefully.
The running assumption for over a year is that Washington is comfortable with the dollar depreciation that comes with the type of shift in cross-border investments required for a true global trade reset or reduction of global imbalances.
Trump referred to January’s sharp dollar drop as “great”. And Treasury Secretary Scott Bessent may have wheeled out the decades-old, slightly tarnished ‘strong dollar’ mantra, but he has also routinely qualified the phrase as not necessarily referring to prevailing exchange rates. He argues that a “strong dollar” refers to policies that eventually bring strength.
At the same time, questions remain about whether there are any implicit agreements regarding exchange rates embedded in the multiple bilateral trade deals Trump has been engaged in, especially across Asia.
But regardless of what is happening behind the scenes or what leaders’ plans truly are for currency internationalization, markets are reluctant to shake off the dollar’s New Year relapse.
EURO AND YUAN WEIGHTS
Curiously amid all the dollar angst, the euro/yuan exchange rate has barely budged since last April’s U.S. tariff shock.
For two regions so highly interconnected by trade, that stability is important, even if the dollar continues to decline further against both of them.
For example, the yuan accounts for 15.5% of the ECB’s trade-weighted euro basket, close to the 17.4% weighting for the dollar. Likewise, the euro’s 18% share of China’s trade-weighted yuan basket is also almost on par with the dollar’s portion.
While the euro’s weight in the Federal Reserve’s broad dollar trade-weighted basket is a whopping 21%, more than twice the yuan’s 10%, the likelihood is that any dollar weakness against either currency will quickly feed through to the other.
For cross-border investors, especially those in government bonds, the prospect of steady multi-year currency appreciation makes a considerable difference when choosing between higher-yielding Treasury bonds and European or Chinese equivalents.
Charles Gave at Gavekal Research points out that the 220-basis-point premium on five-year U.S. Treasury yields over equivalent Chinese bonds would effectively be eaten up by another 10% drop in the dollar against the yuan between now and 2031, making the lower-yielding China debt more attractive.
And given that Chinese inflation has been running at least 200 bps below that in the United States for more than five years, that appreciation is fundamentally justified, Gave added.
Reports this week that Chinese regulators prodded their own banks and investors to rethink their heavy concentration in U.S. Treasuries has only added to the negative dollar drumbeat.
For euro debt, the currency calculations for investors will be even more compelling, not least because exchange rate strength may force the ECB to eventually lean into further easing.
So maybe everyone is happy with a weaker dollar after all, and there’s no real need for some grand bargain or new accord to unwind more than a decade of overvaluation?
That could be true. But markets can snowball very quickly. Watch this space closely.
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(by Mike Dolan; Editing by Marguerita Choy)
