China is no longer a currency manipulator. The Treasury Department made that announcement Monday. The decision is part of President Trump’s broader agenda on trade. It’s another sign to the market that trade talks with China are going in the right direction, and that is a big reason the U.S. stock market keeps marching higher.
“The Treasury Department has helped secure a significant Phase One agreement with China that will lead to greater economic growth and opportunity for American workers and businesses,” said U.S. Treasury Secretary Steven Mnuchin in the department’s news release. “China has made enforceable commitments to refrain from competitive devaluation, while promoting transparency and accountability.”
Foreign-exchange markets are arcane, often thought of as the domain of suspendered traders sitting in New York, London, and Hong Kong. But currency fluctuations can roil stock markets from time to time.
Back in August, for instance, the Dow Jones Industrial Average was sporting a 3.1% intraday drop, while the S&P 500 was down 3.2%, and the Nasdaq Composite had slumped 3.8%. Those are huge one-day moves in the stock market. The reason? The Chinese currency—the Yuan—broke the level of 7 to the dollar. China was weakening its currency. It was becoming less expensive in terms of the U.S. dollar.
The Yuan peaked at about 7.18 to the dollar in August—it took more than 7 Yuan to purchase $1 in the summer. Today, it takes 6.90 Yuan to purchase $1. The difference is less than 4%. It seems small given the large impact it had on stock markets. But currencies can become weapons in the trade war. What’s more, currencies don’t typically fluctuate like stocks.
The Yuan is typically quoted in Yuan required to buy $1. The inverse of the quote is how many U.S. dollars it takes to buy one Yuan. It costs about 14.5 cents to purchase one Yuan today.
The Chinese currency doesn’t freely float like most currencies. The Chinese government tries to control the price by buying and selling currencies with its foreign-exchange reserves. Weakening the currency had the potential to nullify the impact of U.S. tariffs on Chinese imports. Import levies, implemented by the current administration, raise the price of goods to American buyers. The weaker currency lowered the price paid by American buyers, offsetting the duties.
That’s ultimately why U.S. government officials hackles were raised and what led to the manipulator designation. It was a trade-based decision.
China, while no longer designated a manipulator, goes on the list of countries whose currencies the Treasury Department is “monitoring,” including Japan, Korea, Ireland, Germany, Italy, Singapore, Malaysia, Vietnam, and Switzerland. It’s a long list. But “the monitoring list designation has no formal implications, except possible heavy criticism from the U.S.,” wrote Standard Charter analyst Steve Englander in a Tuesday research report.
The U.S. government has indicated that after the phase-one trade deal is signed, it would like to see further Yuan appreciation. A stronger Chinese currency makes U.S. exports less expensive and Chinese imports into the U.S. more expensive. U.S. manufacturers like a weaker dollar, but American consumers tend to like a stronger dollar—it gives them more bang for their buck.
“For investors, the question is whether [Yuan appreciation] is a Treasury aspiration for whether China has indicated, as part of the phase one deal, that it will strengthen the [Yuan] as tariffs are removed,” adds Englander.
So U.S. investors can follow the currency to infer how U.S.-China trade negotiations are proceeding.
Write to Al Root at firstname.lastname@example.org