Strong US dollar and continuous depreciation of the Chinese yuan may put pressure on the cryptocurrency market.
Strong US dollar and ongoing depreciation of Chinese yuan could affect cryptocurrency market.
Translation: BlockingBitpushNews Mary Liu
Over the past few months, the Chinese yuan has continued to depreciate against the US dollar. On May 31, the onshore RMB/USD exchange rate fell to 7.0978, breaking through the 7.1 level for the first time since the end of November. The renminbi has fallen by about 3% since May, its worst performance since September last year. In February, the renminbi depreciated by 5% against the US dollar.
Investment banking giant Goldman Sachs recently said in a report that although policy makers are trying to boost market sentiment, the renminbi may face more devaluation pressure. Some observers believe that potential intervention by the People’s Bank of China to curb renminbi volatility could accelerate the rise of the US dollar and exacerbate the plight of the cryptocurrency market.
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Historically, the depreciation of the renminbi, as one of the five currencies in the IMF’s special drawing rights basket, is considered beneficial to alternative legal currency assets such as Bitcoin and gold, but the other side of the coin is the strong US dollar. Some observers say that the US dollar is already on an upward trend, and further strength could lead to sustained global currency tightening and a headwind for risk assets, including cryptocurrencies.
The People’s Bank of China (PBOC) adjusts the RMB against a basket of currencies through a floating exchange rate system, setting a daily fixed point or midpoint for market direction. The currency basket reflects China’s trading partners, with the United States being the largest and the US dollar having the highest weight at 19.83%. The euro, yen, pound, Australian dollar, and Mexican peso are some of the other currencies in the basket.
The PBOC’s managed floating exchange rate allows the renminbi to fluctuate up and down 2% from the daily midpoint, and the bank manages this range by actively buying and selling the renminbi. For example, if the USD/CNY is expected to rebound beyond the 2% limit, the central bank will sell US dollars and buy renminbi to support the value of the renminbi. At the same time, the central bank purchases US dollars against other currencies to maintain the stable proportion of the US dollar in its reserves, keeping the exchange rate of the renminbi at a reasonable and balanced level.
Industry insiders say the process inadvertently brought upward pressure on the US dollar index, which is dominated by the euro and yen, causing global financial tightening and triggering safe-haven sentiment.
David Brickell, sales director of the cryptocurrency liquidity network Blockingradigm, told CoinDesk: “The rebound in the USD/CNY means that the People’s Bank of China will sell the currency pair to maintain a 2% range, and it has to buy the USD against other currencies to maintain the stable proportion of USD reserves. This pushed up the US dollar index, causing financial tightening and safe-haven sentiment.”
When the US dollar soars, those who have US dollar borrowings and other currency incomes find it difficult to repay their debts. According to Brickell, more than $17 trillion of US dollar debt has been issued overseas. Therefore, a strong US dollar often triggers safe-haven sentiment worldwide.
The US dollar index rose 2.7% this month. Meanwhile, Bitcoin fell 7.3%, its largest monthly decline since December last year.
CoinDesk and Genesis Trading’s former research director Noelle Acheson said that the People’s Bank of China’s intervention measures may benefit the US dollar, but emphasized that such actions are uncertain.
Noelle Acheson said: “The People’s Bank of China has been suggesting that the target range of the renminbi is more flexible than in the past, so it will not intervene, especially if the depreciation of the renminbi helps exports (exports are affected), and now China’s priorities are different-and the People’s Bank of China has been diversifying its reserves and can buy gold instead of more dollars.”
Last month, the governor of the People’s Bank of China, Yi Gang, said that China has basically stopped regular intervention in the renminbi, and may gradually cancel currency intervention by gradually reducing the quantity and frequency of market entry in the future. However, Yi Gang emphasized that the central bank will retain the right to intervene in the market during periods of turmoil.
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