- The Chinese yuan is coming under pressure after growing rhetoric by the US holding China responsible for the coronavirus outbreak.
- The US dollar to yuan exchange rate has fallen 0.5% since end of April when US president Trump said “there was a high degree of confidence” that coronavirus emerged in a Wuhan lab.
- Analysts warn that rising tensions could devalue yuan which could then spark devaluations of other major currencies.
- But if the phase one trade deal between China and the US goes as planned, then impact to currencies will be more limited.
- Watch the yuan trade live on Markets Insider.
Escalating tensions between US and China on who is responsible for the outbreak of COVID-19 will not just push the Chinese yuan lower, but could also spark a major devaluation across numerous major currencies, analysts warn.
The US dollar to yuan exchange rate has fallen about 0.5% since end of April when US President Donald Trump said there was a “high degree of confidence” that the virus originated from the Wuhan Institute of Virology.
Trump has signalled that one way to punish China for its handling of the outbreak could be to implement additional tariffs.
Analysts warned that the impact of an escalation in the trade-war between US and China will be disastrous for all currencies.
A US-China war could devalue all currencies
Naeem Aslam chief markets analyst at Avatrade, said: “Traders are concerned China could devalue its currency and that will have a more ripple effect across other emerging market currencies.”
Aslam added: “There could be a currency war with every central bank looking to devalue its currency.”
“With another US-China trade war, renminbi will weaken considerably and the exchange rate will be around 7 yuan per US dollar,” he said.
The dollar to yuan exchange rate is 7.09 as of 4:45 a.m, according to Markets Insider data.
Mark Le Dain, vice-president of strategy at Validere said: “The world typically does better when the US dollar appreciates less.”
Coghlan added: “The US dollar is acting as a safe haven asset, if we get another outbreak, I see yuan ranging between 7.8 and 8.1 per dollar.”
Other currencies particularly are at risk are the Japanese yen and the Swiss franc, analysts said.
Aslam said: “The Japanese yen next door to China is also a big threat. Japan is the biggest holder of US treasuries.”
Aslam said devaluation in yuan will boost the Chinese economy at the expense of other economies.
“China will become a more attractive place from an import point of view and it will strengthen the Chinese economy,” he said.
Coghlan pointed out that the US-China phase one trade deal may be affected a result of the growing tensions.
China and the US agreed earlier this week to improve the atmosphere for the implementation of the phase one deal adding that both countries are expected to meet their obligations.
The US and China signed the phase one trade agreement in January this year after months of squabbling, but experts think the deal could still break through after the coronavirus has wrecked the US and China’s economies, as well as global economies.
Coghlan said: “If we did have a China-US trade war that would be disastrous.”
Aslam said under that scenario China would devalue its currency and “we would go back to square one”.
The exchange rate fell to a low of 6.27 in April 2018, the year when the trade war began between both countries.
But Coghlan pointed out that China released a list of 79 US goods eligible for import waivers, signalling that both countries are keen to prevent another trade war.
But a persistent blame-game between both nations will keep yuan volatile in recent months.