Movers & Shakers: Performances and prospects of global currencies

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The value of the yuan against the US dollar slipped slightly on Wednesday after hitting a three-year high on Tuesday. The decline caused the People's Bank of China to set its midpoint fix five basis points weaker than on Tuesday.

So how have major global currencies performed in 2017 and what are their prospects for next year?

Chinese yuan

After declining for several months in the second half of 2016, the value of the Chinese currency Renminbi, or yuan, picked up at the beginning of this year. It was valued at about 6.9 against the US dollar in January, but climbed to around 6.5 in December.

China's positive economic performance this year drove up the value of the yuan. China's GDP growth stayed at 6.9 percent during the first two quarters, and was 6.8 percent in the third, all of which are solid supports for the yuan, said Liu Jian, senior researcher at Bank of Communications.

In addition, a fall in the US dollar index of about nine percent also helped. Since the beginning of the year, the interest rate margin between Chinese and US currencies has increased from about 70 basis points to about 160 basis points.

Li Liuyang, chief analyst at China Merchants Bank, expected a weak US dollar next year. He also said the yuan might appreciate against the US dollar in 2018, following other currencies, which would "be a breakthrough for the yuan's internationalization."

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Meanwhile, the increasing value of the Chinese currency brought growing demand for the yuan’s assets. According to the State Administration of Foreign Exchange (SAFE), in September, China saw a net foreign exchange purchase of 300 million US dollars, the first settlement surplus in more than two years.

The regulator also said supply and demand in the forex market continues to be balanced, with cross-border capital flows through major channels staying at a stable and reasonable level. Moreover, the National Bureau of Statistics (NBS) said earlier this month that the economy would maintain a medium-high growth with a trade surplus and abundant foreign reserves.

The US dollar

The US dollar is not expected to undertake another big rally next year, due to central banks in the rest of the world ”catching up” by raising their interest rates. The Dollar Index fell from 103.82 to 91.01 during 2017, and now hovers around 93.5. For the year, the index was down about 8.5 percent.

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The US Federal Reserve (FED) has expressed strong confidence in the US economy in the coming year, and so is expected to raise interest rates three times. Experts have expressed belief the move indicates a future depreciation for the US dollar.

Normally, money seeks its highest level so rising rates should attract inflows of foreign capital into the US. However, this is not expected to occur in 2018 since investors believe the Fed may actually be nearing the end of its rising interest rate cycle.

The euro and British pound

With receding political risks and improving economic fundamentals, the euro is benefiting from a positive outlook. The euro against the US dollar has increased to around 1.1868 recently, up nearly 15 percent for the year. Analysts predict that the euro will remain stable in 2018.

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Meanwhile, the British pound against the US dollar has reached 1.3657 by November, up nearly 14 percent this year. In the UK, the economy has gradually rebounded from Brexit. And the Bank of England has raised interest rates for the first time in more than a decade, underlining the economy’s relatively successful navigation of its economy.

Government officials from China and the UK have been accelerating talks about the Shanghai-London Stock Connect. High-level government officials from the two nations met recently and said they will continue to expand cooperation in the financial sector.

Market players believe the connection between Shanghai and London will be inaugurated next year, and that would accelerate the internationalization of the yuan.

The “Shanghai-London Stock Connect could be released next year. Some new forex products like forex futures may be expected to open in 2018. There will be much progress in the domestic forex construction and more reforms will be pushed up next year,” Li predicted.

(CGTN’s Wang Yue and Wang Yiqian also contributed to the story.)