The drumbeat of U.S. dollar weakness accelerated last week at the Jackson Hole Economic Policy Symposium, a central banking conference held annually in Wyoming.
At the meeting, neither U.S. Federal Reserve Chair Janet Yellen nor European Central Bank President Mario Draghi said anything to discourage the continuing fire sale of the greenback. And seeing the euro rise to $1.20 per euro before falling slightly to $1.18 was a watershed moment for a currency that was forecast to be at parity with the U.S. dollar by this time.
While all that was happening, however, we've been watching a very interesting development that's not making a lot of headlines.
The Chinese renminbi has appreciated over 5 percent this year to 6.60 yuan per dollar - a level not seen since June 2016. Back in 2015, we started seeing the Chinese currency depreciate against the dollar, but this year the renminbi has already regained a third of what it lost.
Not so long ago, the hedge fund world was placing massive bets that the renminbi would be weakening to 7.50 yuan per dollar. But once again, China has defied prognosticators who thought its government could not prop up the currency due to the amount of capital that flows out of the country.
China has gotten some help from U.S. politics and a Trump administration that is struggling to accomplish its legislative agenda. As a result, although U.S. equities remain positive, currency markets are pulling away from the dollar in droves.
Admittedly there is something of a feedback loop going on here. Uncertainty in the current geopolitical environment is affecting expectations of continued interest rate hikes by the Federal Reserve, which in turn leads to more questions about the future health of the U.S. economy.
My View: We may be looking at a looming geopolitical tussle, as a strengthening renminbi aids China in its arguments on bilateral trade with the U.S. Add in October's 19th National Congress of the Communist Party, at which Chinese President Xi Jinping will announce his five-year plan, and it's likely that we will be hearing a lot more about China this fall.
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