Weak dollar props up yuan in 2017

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‍2017 was a great year for the yuan. Official data showed that the Chinese yuan appreciated nearly seven percent against the US dollar throughout 2017. And the yuan’s midpoint rate increased by 5.8 percent against the US dollar, rising over 4000 basis points.

A lackluster performance from the US dollar last year also contributed to the yuan’s rise. The value of the US currency dropped against several global currencies in 2017, making it the currency's worst performance since 2003. Moreover, the Fed's rate hikes, approval of tax reforms and the nation's massive debt were behind the dollar's decline.

“The RMB has risen versus the US dollar. That’s mostly because of the fall in US dollars. According to the Fed reserve index, the dollar’s nominal index to major currencies fell by 8.7 percent for the whole year of 2017,” said He Weiwen, a senior fellow at the Center for China and Globalization.

Besides, an improving domestic forex market contributed to the yuan's rally after the regulator introduced a counter-cyclical factor in setting the currency's daily fixing last May. Meanwhile, a better-than-expected national economy also boosted investors' outlooks as China's financial de-leveraging efforts continue.

But, how long can the growing momentum last?

Xie Yaxuan, an analyst at China Merchants Securities, said he expected the yuan to trade in a range of 6.45 to 6.90 per US dollars in 2018, due to the domestic foreign exchange supply and demand, and potential gains in the dollar.

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But He forecasted yuan-dollar performance in 2018 would mainly “depend on the changes of the US dollar. At the current moment, I think we should be careful about the US dollar's changes. At least for the first quarter, the scenario might remain the same. But starting from the second quarter, there might be some changes.”

In addition, he is positive on the prospects of China's currency. In his opinion, a stable Chinese economy this year can help avoid turbulence in the foreign exchange market, raising the value of yuan slightly.

Data from the China Foreign Exchange Trade System on Thursday showed that the midpoint rate of the yuan declined slightly to 6.5043 against the US dollar. That came after the People's Bank of China lowered its official midpoint for the first time in five days as the dollar strengthened on solid US economic data.