On the 19th, the dollar index stabilized slightly at a 10-month low; the USD/CNY rate first rose then eased, with its gains narrowing, and hit a fresh 9-month high intraday. Market participants noted that as the dollar “corrects overshooting,” the RMB is also in the process of correcting earlier pessimistic expectations. Given the interplay of internal and external factors, the dollar may remain weak, and at this stage the RMB/USD rate still has room to move higher with fluctuations.

　　Fresh 9-month high intraday

　　Recently, as the dollar index kept setting new lows in this correction, the USD/CNY rate has climbed to its highest level since last year's fourth quarter.

　　On the 19th, the central parity rate of the RMB against the dollar was raised by 160 basis points to 6.7451, the highest since October 20 last year. The previous day, the market rate of the RMB against the dollar had already broken through 6.75.

　　On the 18th, the onshore RMB/USD rate opened higher and ran higher, closing at 16:30 at 6.7580, up 119 basis points; the night session closed at 23:30 at 6.7478, with an intraday high of 6.7464. The offshore RMB/USD rate in Hong Kong closed at 6.7498, with an intraday high of 6.7432.

　　Also on the 18th, the dollar index closed down 0.51%, hitting a 10-month intraday low of 94.477. The weaker dollar index was seen as the main reason for the RMB's strengthening against the dollar that day.

　　During Asian-European trading on the 19th, the dollar showed slight recovery; accordingly, the RMB's gains against the dollar eased. In early trading, stimulated by the higher central parity, the onshore RMB briefly spiked to a fresh 9-month high of 6.7464, then quickly consolidated near the previous close, ending at 16:30 at 6.7556, up 24 basis points from the previous close.

　　Yesterday, the offshore RMB rate in Hong Kong also first rose then eased, pulling back slightly; as of 16:30 Beijing time on the 19th it stood at 6.7558, down 56 basis points from the previous close.

　　Based on rates at 16:30 Beijing time on the 19th, since the start of the year, the RMB's central parity against the dollar has appreciated 2.77% cumulatively, the onshore RMB 2.8%, and the offshore RMB 3.07%. Over the same period, the dollar index fell 7.4%.

　　Internal and external factors resonate

　　Since the start of the year, the RMB against the dollar has seen at least three major appreciation runs, performing well above market expectations at the beginning of the year. That the dollar index reversed after hitting a more-than-decade high early in the year was also unexpected for most market participants. Dollar weakness is the key driver of this round of the RMB's stronger-than-expected appreciation. Looking ahead, the onshore and offshore RMB/USD rates will largely follow dollar fluctuations, and the dollar's phased weakness may not be over yet.

　　This round of dollar depreciation is a correction of the supercycle of the past few years.

　　The dollar stood out over the past few years, fully reflecting market expectations of the Fed's gradual monetary tightening; especially after the Trump trade emerged in November last year, it further priced in optimistic expectations of Trump administration policies such as tax cuts and infrastructure spending, and of U.S. economic growth and reflation, driving the dollar index to a more-than-decade high.

　　After that, steady economic growth and policy adjustments could no longer give the dollar extra support; the fact that the Fed's first two rate hikes this year both failed to reverse dollar weakness is evidence. Moreover, if earlier optimistic expectations are not met, the dollar will face a test of “expectation gaps.” For example, since the start of the year, the implementation of Trump's various policy proposals has consistently fallen short of expectations, and the repeated setbacks to healthcare reform have left the dollar troubled by such gaps.

　　It should be noted that the contribution of cyclical factors to dollar appreciation is already weakening at the margin, while challenges to the dollar from U.S. growth volatility, Trump-trade swings and political events are worth attention. At the same time, as global recovery resonates and policy divergences among major central banks narrow, the core factor that supported the strong dollar in recent years — the “lead of U.S. economic and policy cycles” — has also shifted. In the short to medium term, dollar weakness may not be over, which is favorable for keeping the RMB exchange rate stable.

　　As for the RMB, internal support also shows signs of strengthening. Recently, China's economy has been stable and improving, returns on capital have risen, the foreign trade surplus has stayed high, and the opening of stock and bond markets has attracted inflows — all of which help reduce the risk of RMB depreciation.

　　Overall, compared with the start of the year, market concern about RMB depreciation has clearly declined; if the dollar stays weak, residents' willingness to convert foreign exchange may rebound, leaving room for the RMB to move higher against the dollar with fluctuations.