Recently, tensions have been rife in the global foreign exchange market. U.S. Treasury Secretary Janet Yellen has announced in a high-profile manner that she plans to suppress the renminbi and force it to devalue. The news sparked a frenzy of global bears, leading to increased volatility in the foreign exchange market, with the yen even falling below the 160 mark against the dollar for a time, falling to a 30-year low. Let's take a look at what is really going on in this currency war in the United States.
U.S. strategy: lock on the target and knock down the yuan
Since 2023, inflation in the United States has remained high, and the Federal Reserve has continued to raise interest rates. Yellen argues that a strong renminbi has allowed China to gain more trade surpluses, which has hit U.S. exports and widened the U.S. trade deficit. As a result, she actively pushed the Fed to maintain a hawkish monetary policy and pressured other countries to side with the United States against the yuan.
Her strategy is clear: to devalue the renminbi through intense pressure, so as to attract global capital back to the US market and consolidate the dominance of the dollar. As soon as her policy signal was issued, speculative bears around the world immediately targeted the renminbi. However, the renminbi did not collapse as quickly as they expected, and remained relatively stable with the intervention of China's central bank. Although the renminbi briefly slipped to 7.35 against the dollar, it eventually remained in the range of 7.2-7.3.
The "insistence" of the yuan disappointed the bears, but they found that the yen became an easier target under the ultra-loose monetary policy of the Bank of Japan. The Bank of Japan has kept interest rates zero for a long time in order to revive the domestic economy, which is tantamount to opening the door to the influx of speculative capital. The bears quickly targeted the yen, which fell below the 160 mark against the dollar in October 2023, hitting its lowest level since 1990.
The Bank of Japan (BOJ) tried to intervene in the market, but due to its own policy constraints and external pressures, it failed to do so many times, but instead caused more investors to withdraw from the JGB market, adding to the panic. The fall of the yen is undoubtedly the biggest loser in this currency game.
Unlike the Bank of Japan's reactive reaction, the PBOC has actively taken steps to resist the pressure. As global speculators frantically suppressed the renminbi, China's central bank held its ground. It has invested in the offshore market to balance the exchange rate of the US dollar, maintained market expectations through a stable interest rate policy, and strengthened the supervision of capital outflows to prevent malicious arbitrage capital flight.
These moves helped keep the RMB exchange rate between 7.2-7.3, curbing further actions by the bears. In stark contrast to the yen's plunge, the renminbi has shown strong resilience, showing that the prudent strategy of the People's Bank of China (PBOC) has played a key role.
In this currency game, the US dollar has become more stable under the Fed's continuous interest rate hike policy. The U.S. dollar index rose to a high above 110 in 2023, and investors rushed back to the U.S. market. The dollar's strong position has also won capital inflows to the United States, but there is a price to be paid for this.
A strong dollar has exacerbated instability in the global trade and financial system, putting enormous pressure on the exports of emerging market countries, causing capital outflows and currency depreciation. In addition, an overly strong dollar could also affect the competitiveness of U.S. exports, causing U.S. products to lose their edge in the global market.
In the face of this currency war, both China and Japan are adjusting their strategies. Recognizing the importance of continuing to promote the internationalization of the renminbi, China has made efforts to sign currency swap agreements with countries along the "Belt and Road" to further consolidate the role of the renminbi in global trade. At the same time, China is also vigorously supporting high-tech and emerging industries, reducing dependence on foreign trade and enhancing the resilience of the domestic economy.
Japan, on the other hand, is aware of the drawbacks of its ultra-loose policy and has begun to gradually ease yield curve control, allowing interest rates to float in order to stabilize the yen. In addition, Japan is trying to recover capital inflows through policies that are more attractive to foreign investors.
This currency war has caused turmoil in global markets, with both the yen and the yuan being targeted by bears. But the end result was unexpected: the prudent strategy of the People's Bank of China kept the yuan stable, while the Bank of Japan's hesitation sent the yen into a deep trough.
This currency war is a scene in the global financial game, and Yellen's statement is just one of the actions. In future currency wars, prudent policies, flexible strategies, and strong economic strength will remain key to countries coping with the volatility of the global financial system.
But the battle is not just about the economy, it's also about the global political landscape. In the complex context of globalization, countries need to be cautious in their responses, avoid turning their economies into "gamblers' bargaining chips", and find a balance between the pursuit of monetary stability and economic development. It remains to be seen whether Yellen and the Fed's strategy will work.