Explainer | US dollar-yuan exchange rate: what is it and why is it important?
- The exchange rate between China’s yuan and the US dollar has become a closely watched issue again, including being dragged into the trade war between the two nations
- A lower yuan exchange rate figure means it takes fewer yuan to purchase one US dollar, indicating a stronger Chinese currency
What is the yuan’s exchange rate with the US dollar?
The US dollar is freely convertible into the currencies of all developed economies without restrictions and its trade-weighted value – expressed by the dollar index, or DXY – affects its value against the Chinese yuan, whose exchange rate is managed by the Chinese government.
In China’s case, a lower yuan exchange rate figure actually indicates a stronger Chinese currency as it means it takes fewer yuan to purchase one US dollar. In the same vein, a downward sloping graph of the USD/CNY exchange rate reflects an appreciation path for the yuan’s value, while an upwards sloping graph reflects yuan depreciation.
Why is the yuan’s exchange rate with the US dollar important?
The USD/CNY exchange rate, in addition to being an indicator of relative economic strength, has a direct impact on each nation’s economy by affecting the value of imports and exports.
In general, a stronger exchange rate makes a country’s exports more expensive, which can reduce demand for them. But a stronger exchange rate makes imports, in particular energy products, cheaper, potentially increasing demand in the longer run and helping to hold down domestic inflation in the near term.
So a weaker yuan against the US dollar would generally make Chinese goods exported to the US cheaper, increasing demand, while making US exports to China more expensive, reducing demand. As a result the US trade deficit would likely widen.
A stronger yuan against the US dollar would have the opposite effect.