Dollar rises, yuan slumps as China's Covid-19 unrest spooks markets

SINGAPORE - The dollar climbed on Monday (Nov 28) as protests in China against the government's anti-Covid policies made investors turn away from riskier assets, and consigned the Chinese yuan to a more than two-week low against the safe-haven greenback.

The protests have flared across China and spread to several cities in the wake of an apartment fire that killed 10 people in Urumqi in the country's far west. Hundreds of demonstrators and police clashed in Shanghai on Sunday night.

Investors were worried over how the government in Beijing would react to the the wave of civil disobedience when Covid-19 cases are rising.

"We're really looking at the government response to what's happening ... the government response is so unpredictable, and of course that just means de-risking," said Chris Weston, head of research at Pepperstone.

The offshore yuan fell to an over two-week low in Asian trading, and was last roughly 0.4 per cent lower at 7.2242 per US dollar.

The Australian dollar, often used as a liquid proxy for the yuan, slid more than 1 per cent to $0.6681. The kiwi fell 0.72 per cent to $0.6202.

China's stringent Covid-19 restrictions have taken a heavy toll on its economy, and authorities have implemented various measures to revive growth. On Friday, the People's Bank of China (PBOC), the nation's central bank, said it would cut the reserve requirement ratio (RRR) for banks by 25 basis points (bps), effective from Dec. 5.

"If the RRR cut is the only monetary policy tool that the PBOC is going to implement, it may not lead to a significant increase in bank lending," said Iris Pang, chief economist for Greater China at ING.

"Companies are currently facing weaker retail sales from a higher number of COVID cases and falling home prices from unfinished home projects."

Elsewhere in the currency market, the euro fell 0.5 per cent to $1.0350, while sterling was down 0.26 per cent at $1.2057.

The latest developments in China have put a pause on the U.S. dollar's decline, which had been softening over the past few weeks on hopes that the Federal Reserve would soon slow its pace of rate hikes - a view that was supported by the November meeting minutes released last week.

Against a basket of currencies, the U.S. dollar index rose 0.07 per cent to 106.41, edging away from its recent three-month low of 105.30.

Fed Chair Jerome Powell is due to speak on the outlook for the U.S. economy and the labour market at a Brookings Institution event on Wednesday, which could provide more clues on the outlook for U.S. monetary policy.

Market expectations of a less hawkish Fed have helped the Japanese yen gain a footing, said Moh Siong Sim, a currency strategist at Bank of Singapore.

The yen was up about 0.5 per cent to 138.40 per dollar.

"The market is thinking that the Fed downshifts to a 50-basis-point rate hike and perhaps going to a pause next year, and that might limit the upside in U.S. (Treasury) yields. And dollar/yen is probably queuing into that sort of idea."

Source: Reuters