Question

Why did the onshore yuan depreciate against the US dollar on Thursday, dropping 872 basis points in a three-day weakening streak and accumulating a more than 3 percent depreciation this year? Analyze using the complete theory, unifying the monetary and asset approaches. Consider factors such as China-US monetary policy divergence, the US economy's resilience, and the widening US-China interest rate differential.

Answer 1

The onshore yuan depreciated against the US dollar on Thursday due to factors such as China-US monetary policy divergence, the US economy's resilience, and the widening US-China interest rate differential.

Step-by-step explanation:

The onshore yuan depreciated against the US dollar on Thursday and experienced a three-day weakening streak due to several factors:

1. China-US monetary policy divergence: Lower US interest rates make US assets less desirable compared to assets in the European Union. This leads to a decrease in demand for dollars and an increase in supply of dollars in foreign currency markets, causing the dollar to depreciate.
2. US economy's resilience: A resilient US economy attracts investors who seek higher returns. This can contribute to the depreciation of other currencies, including the yuan, as money flows into the US.
3. Widening US-China interest rate differential: When the interest rate differential between the US and China widens, investors are more likely to invest in the higher interest rate country (in this case, the US). This can lead to a decrease in demand for yuan and an increase in supply, causing its depreciation against the US dollar.

These factors, combined with other economic and geopolitical dynamics, have resulted in the onshore yuan depreciating by a significant amount against the US dollar.