SMM1, 26 Jan (Xinhua) the US dollar index hit a new low of 88.416 on January 25 as a result of Trump's trade protectionism and the remarks of US Treasury Secretary Nuchin and other officials, while at the same time, the RMB continues to climb. At one point, the onshore renminbi hit 6.3136, and the rise and fall of the dollar and the renminbi sparked heated debate in the market: what is the impact of sharp fluctuations in the exchange rate on Sino-US trade? Will China's huge dollar reserves be affected? Wait. SMM invited Bloomberg economist Chen Shiyuan to analyze the current hot topic.
One aspect of the Trump administration's trade protection measures is the US government's verbal intervention in the dollar, Mr Chen said. Trump himself has repeatedly said last year that he does not like a strong dollar, while US Treasury Secretary Nuchin in Davos has said that a weak dollar is good for the United States. These interventions have resulted in fluctuations in the exchange rate of the United States dollar. In addition, excessive trade protectionism will lead to counter-measures, endangering U. S. exports and the economy, which is also bad for the dollar. However, limited protectionism could increase United States exports and reduce imports, which would actually benefit the United States dollar. Taken together, the impact of the US government's verbal intervention is limited and short-lived, and limited protectionism will raise the dollar to some extent over a longer period of time.
At present, the market is more pessimistic about the outlook for the dollar. But Chen Shiyuan believes that in 2018, as US economic growth accelerates and the Federal Reserve continues to tighten its monetary policy, the dollar has some fundamental support: on the other hand, the international financial risks this year are significantly greater than last year. Trade problems between China and the US, Brexit, China's deleveraging and high stock market valuations could all cause volatility in international financial markets. In general, when international risk increases, cross-border capital is retained back in the United States, which is beneficial to the dollar exchange rate.
The renminbi has appreciated significantly against the dollar over the past year, but Chen Shiyuan has had a relatively limited impact on exports because the renminbi has appreciated less against a basket of currencies. As export growth accelerates as the international economy recovers, central banks should be less concerned about the impact of the appreciation of the renminbi on exports. The appreciation of the renminbi against the US dollar will attract overseas investors to hold the renminbi, ostensibly conducive to the internationalization of the renminbi in the short term. In fact, however, in the long run, the internationalization of the renminbi is mainly determined by China's economic fundamentals and China's international influence.
The depreciation of the United States dollar would, on paper, increase the value of foreign exchange reserve assets denominated in United States dollars, as the dollar value of other assets, such as the euro, would increase. The market, on the other hand, focuses on the dollar value of foreign exchange reserves. Chen Shiyuan said that with the fluctuation of the dollar, China is unlikely to reduce its holdings of US Treasuries on a large scale, as this will not only cause the price of US Treasuries to fall, but also lead to a loss of China's foreign exchange reserves. In the long run, Treasuries remain the safest and most liquid investment in the world.