In the intricate realm of global finance, the performance of currencies can serve as a barometer for economic health and geopolitical stabilityAs we venture into 2025, the U.S. dollar has emerged as a formidable player, surging past the 110 mark and reaching highs not seen since November 2022. This bounce back has been driven by shrinking expectations around the Federal Reserve's monetary easing policies, coupled with the emergence of "presidential trade" in the United States, casting other currencies, particularly the renminbi, in the spotlight.

Since 2024, global currency markets have undergone significant fluctuationsFollowing a series of interest rate cuts anticipated from the Federal Reserve, the dollar index plummeted towards the 100 mark by the end of September 2024. Yet by the end of the following September, the dollar index rose by an impressive 8%, placing immense pressure on other currencies

Major currencies, such as the Japanese yen and the British pound, depreciated nearly by 9% against the dollar, while the euro dropped by 7.86%. In stark contrast, the renminbi has demonstrated remarkable resilience amidst this wave of currency depreciation.

One cannot overlook the primary catalyst behind the renminbi's depreciation: the ascending trend of the dollar indexWith waning expectations for Fed easing and the resurgence of strong dollar policies post the presidential elections, the greenback found itself on a recommenced upward trajectoryEven in light of the Fed's decision on December 18, 2024, to cut rates by 25 basis points, its core interest rate remains high, and inflation has yet to settle back into its target range, leading to market caution regarding future rate cuts

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Additionally, the widening interest rate differential between the U.S. and China has played a crucial role in the downward movement of the renminbi, especially highlighted by unprecedented levels observed on January 10, 2025.

Facing the volatile fluctuations of the renminbi, the People's Bank of China (PBoC) swiftly intervened with a series of measures intended to stabilize the currencyOn January 9, they announced plans for a historic 600 billion yuan issuance of central bank bills in Hong Kong on January 15, 2025, marking the largest single issuance to dateFollowing this, on January 10, the PBoC decided to temporarily suspend outright purchases of treasury bonds in the open marketsFurther, on January 13, monetary parameters guiding cross-border finance for corporations and financial institutions were adjusted from 1.5 to 1.75. Such decisive actions illustrate the PBoC's commitment to maintaining currency stability.

It is essential to note that while the strengthening dollar has caused adverse effects on non-dollar currencies, China's foreign exchange reserves and trade data hint at a more resilient underlying situation

For years, the Chinese economy has sustained a steady growth trajectory, marked by stable policiesOverall, foreign exchange reserves have remained consistent above the $3 trillion threshold since February 2017. By the end of September 2024, these reserves registered at $3.316 trillion, a surge to a five-year high, and stabilized above $3.2 trillion by DecemberOfficials from the State Administration of Foreign Exchange remarked on the stability of the foreign exchange reserves despite a decline in December 2024, citing robust performance in the economy.

In terms of imports and exports, China's total goods trade reached $6.1623 trillion in 2024, marking a 5% year-on-year increaseExports were valued at $3.5772 trillion, and imports at $2.585 trillion led to a record trade surplus of $992.1 billion

The deputy director of the General Administration of Customs, Wang Lingjun, highlighted substantial growth bolstered by a series of initiatives aimed at stabilizing foreign trade since the end of September 2024, resulting in an unprecedented quarterly trade record of 11.51 trillion yuan in Q4. The monthly trade volume exceeded 4 trillion yuan for the first time in December, marking a growth surge to 6.8% for the year.

On the other hand, economic struggles have emerged in the United States, which has leaned heavily on the monetary policies enacted from 2019 to 2020. With inflation fiercely persistent, economic growth has faced significant headwindsBy the third quarter of 2024, U.SGDP growth had dwindled to a mere 2.7%, reflecting clear signs of stagnationMorgan Stanley issued warnings that, should the newly elected president fulfill promises to tighten immigration and impose tariffs, the labor market and trade may struggle immensely, leading to daunting pressures on GDP over the next two years and complicating inflation control.

Goldman Sachs projections suggest that the Federal Reserve may undertake three rate cuts in 2025, potentially lowering the federal funds rate to a terminal rate of 3.25% - 3.5%, down from the current rates of 4.5% - 4.75%. Historical trends indicate that periods of Fed rate cuts coincide with significant slides in the dollar index

During the rate reduction cycle from July 2019 to March 2020, rates dropped from 2.5% to 0.25%, causing the dollar index to tumble from 103 to 89. Similarly, from January 2001 to July 2003, rates fell from 6.5% to 1%, while the dollar index plunged from 120 to 80—indicating a drop of up to 33%. Such patterns posit that if rate cuts occur in 2025, the dollar index may endure continued weakness, offering an increase in value for non-dollar currencies.

Looking ahead to the trajectory of the renminbi in 2025, many analysts believe that domestic factors will become critical due to impending policiesHSBC has announced its Hong Kong branch's intention to participate directly in the renminbi cross-border payment system (CIPS), noting that the use of the renminbi worldwide currently does not match the scale of China’s economy, indicating significant growth potential

As the dollar's sway in global payments appears to be diluting, China’s position in international currency frameworks is poised to enhanceFurthermore, Minsheng Bank emphasized that recent comprehensive policies positively impact the macro economy and capital markets, thereby bolstering the appeal of renminbi assets and providing sturdy underpinning for foreign exchange reserves.

Despite the U.S. dollar's prevailing dominance in the global currency landscape, the resilience of the renminbi, coupled with proactive regulatory measures from the central bank, a robust economic foundation, and burgeoning international influence, signals its ascent within the global monetary hierarchyFrom stabilizing foreign exchange reserves and trade performance to exploring the renminbi’s potential in international payments and challenging the dollar's supremacy, the currency is poised to gradually emerge as a key player on the global stage