Weekly Must-Read: How Will the Yuan Perform in 2025
By Wang Shiyu and Han Wei
The yuan ended 2024 with fewer fluctuations, though it faced increasing pressure from the strengthening U.S. dollar. What factors should we watch for the currency’s performance in the coming year?
On Tuesday, the final trading day of 2024, the onshore yuan closed at 7.2988 against the U.S. dollar, weakening from around 7.09 at the beginning of the year. In the first half, the yuan gradually depreciated to 7.26 as the Federal Reserve delayed its interest rate cuts. Following the Fed’s rate cut in September, the yuan briefly rebounded to around 7.02, but weakened again in November, falling from 7.11 to 7.29, nearing the 7.3 threshold for the first time in nearly a year.
Throughout 2024, the yuan’s exchange rate volatility decreased compared with 2023, dropping from more than 9% to around 4%.
Key external factors influencing the yuan’s performance include the U.S. dollar’s strength, which is shaped by the Fed’s monetary policy, geopolitical risks and other global events. Domestically, the yuan’s exchange rate is affected by China’s trade surplus, export volume, economic performance and other fundamental factors, with seasonal foreign exchange settlements adding further influence.
In the past two months, its exchange rate has been notably influenced by the U.S. presidential election. With Donald Trump’s re-election, U.S. trading partners, China in particular, are expected to face a barrage of renewed tariff threats.
If Trump imposes new tariffs on U.S. imports, prices could rise, potentially putting pressure on U.S. inflation and slowing the pace of the Fed’s rate cuts. Meanwhile, his pro-business policies, such as corporate tax cuts, would probably boost the U.S. stock market, further strengthening the dollar. As a result, the U.S. Dollar Index has climbed from 103.9 to 107.9 over the past two months.
The widening China-U.S. interest rate spread is putting pressure on the yuan. Currently, the 1-year U.S. Treasury yield is 4.20%, while China’s 1-year government bond yield is only 1.02%, creating a gap of more than 310 basis points. If the Fed continues to slow its rate cuts, U.S. yields may stabilize. However, with China still in a rate-cutting cycle, any further declines in Chinese yields could widen this gap.
Huaxi Securities in a research report highlighted that strong U.S. economic data and inflation pressures are limiting room for further Fed rate cuts. Meanwhile, China’s Central Economic Work Conference has indicated a “moderately loose” monetary policy for 2025, which could include rate cuts and other measures to stimulate demand. The resulting divergence in China-U.S. interest rates is expected to lead to capital outflows, increasing the pressure on the yuan and raising expectations of further depreciation.
Market expectations for yuan depreciation remain strong, with the key uncertainty in 2025 being the impact of Trump’s tariff policy. According to Huaxi Securities, the U.S. dollar is expected to remain strong, which could lead to moderate yuan depreciation against it. However, the yuan’s exchange rate against a basket of currencies is likely to remain relatively stable.
The China Foreign Exchange Trade System RMB Index saw steady, modest growth throughout 2024, rising from around 98 to 101, reflecting the yuan’s overall stability against a basket of currencies.
China revised the basket of currencies used to measure the performance of the yuan on Tuesday, adding Macao’s pataca while reducing the weightings of the U.S. dollar, euro and yen, starting Jan. 1.
The yuan’s exchange rate trends will largely depend on policy decisions, Haitong Securities said in a research report. If depreciation pressure increases, the central bank is expected to work to maintain the yuan at a stable, reasonable level. The central bank has a full range of foreign exchange management tools at its disposal, including counter-cyclical factors, offshore liquidity management, foreign exchange reserve interventions and various other mechanisms, said Haitong.
“Given the support from domestic pro-growth policies and efforts to boost exports in the first half of 2025, the yuan’s exchange rate against the dollar is likely to fluctuate around its current level. However, external shocks should be closely monitored,” Haitong said in its report. “If stabilization is needed, the central bank still has several tools at its disposal.”
Contact reporter Han Wei (weihan@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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