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Aug. 27, 2019, 3:28 p.m. EDT

3 reasons why China won’t ‘weaponize’ its currency as trade-war escalates

Fear of a sharp, continued fall in the yuan is one item keeping investors and policy makers awake at night

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By William Watts, MarketWatch


AFP/Getty Images

Get ready for a further weakness in the Chinese yuan, but look for Beijing to limit the drop even as the U.S.-China trade war intensifies, analysts said after the currency this week fell to an 11 1/2-year low versus the U.S. dollar.

The U.S. dollar hit a high of 7.169 yuan /zigman2/quotes/210561991/realtime/sampled USDCNY 0.0000%  on Tuesday, its strongest versus the currency since early 2008. The yuan recently traded at 7.162 per dollar. Downside was kept in check after the People’s Bank of China set the midpoint of its daily trading band at 7.081. That was weaker than the previous fix but stronger than expected, according to Reuters .

/zigman2/quotes/210561991/realtime/sampled USDCNY 7.0353, 0.0000, 0.0000%

The yuan has dropped 3.9% in August amid escalating U.S.-China trade policy tensions. In offshore trade, the currency is down around 3.6% over the same period, according to FactSet.

See: Why a falling Chinese yuan crushed the stock market and intensified the trade war

The fear of a sharp, continued fall in the yuan is one item keeping investors and policy makers awake at night after the yuan’s 2015 devaluation sparked global financial market volatility. While rising U.S. tariffs on imported Chinese goods further muddy China’s economic outlook, and warrant a weaker yuan, Beijing is likely to ensure that the decline is “both controlled and limited,” wrote analysts at UBS, in a Tuesday note.

They offered three reasons:

Nevertheless, the direction for the yuan is likely to be to the downside barring any significant improvement in U.S. - China trade relations, said analysts who look for the yuan to weaken to 7.4 per dollar over the next three and six months and 7.3 per dollar over the next 12 months.

With tensions running high, analysts say they continue to urge investors to hedge yuan long exposure versus the greenback.

/zigman2/quotes/210561991/realtime/sampled
US : Tullett Prebon
7.0353
0.0000 0.0000%
Volume: 0.0000
Dec. 6, 2019 11:26a
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William Watts is MarketWatch's deputy markets editor, based in New York. Follow him on Twitter @wlwatts.

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