The strengthening of the US dollar and the continued depreciation of the RMB may put the encryption market under pressure again

Potential intervention by the People’s Bank of China to curb volatility in the yuan could accelerate the dollar index’s rally and exacerbate crypto market woes, some believe.

Written by: CoinDesk

Compiler: Mary Liu, compared to push BitpushNews Mary Liu

The yuan has depreciated against the dollar in recent months. When Asian markets opened on May 31, the onshore yuan-dollar (USD/CNY) exchange rate once fell to 7.0978, falling below 7.1 for the first time since the end of November. So far in May, the yuan has fallen by about 3%, the most since last year. Worst performance since September. Prior to February, the yuan fell 5% against the dollar.

Investment banking giant Goldman Sachs said in a recent report that despite policymakers' efforts to boost market sentiment, the yuan may face more room to depreciate. Some observers believe that the PBOC’s potential intervention to curb fluctuations in the yuan could accelerate gains in the U.S. dollar index and exacerbate crypto market woes.

Historically, a weaker yuan, one of the top five currencies in the IMF's Special Drawing Rights basket, has been seen as a boon for fiat-tender alternative assets like bitcoin and gold, but the flip side of the coin is a strong U.S. dollar. Some observers say the dollar is already on an uptrend, and further strength could lead to continued monetary tightening around the world and headwinds for risk assets, including cryptocurrencies.

The People's Bank of China (PBOC) regulates the yuan with reference to a basket of currencies through a system of floating exchange rates, with a daily fixed or midpoint set every trading day to provide direction to the market. The currency basket reflects China's trading partners, with the U.S. being the largest and the U.S. dollar having the highest weighting at 19.83%. Euro, Japanese Yen, British Pound, Australian Dollar, Mexican Peso are some of the other currencies in the basket.

The People's Bank of China's managed floating rate allows the yuan to fluctuate 2 percent above or below a daily midpoint rate, and the bank manages that range by actively buying and selling the yuan. For example, if USD/CNY is likely to rebound beyond the 2% limit, the central bank will sell USD and buy CNY to support the value of CNY. At the same time, the central bank buys US dollars against other currencies to keep the proportion of US dollars in reserves stable and to keep the RMB exchange rate basically stable at a reasonable and balanced level.

Industry sources said the process had inadvertently put upward pressure on the U.S. dollar index dominated by the euro and yen, leading to a global financial tightening and sparking risk aversion.

David Brickell, director of institutional sales at cryptocurrency liquidity network Paradigm, told CoinDesk: “The rebound in USD/CNY means the PBoC will sell the pair to maintain the 2% range and have to buy USD against other currencies to maintain USD reserves stable ratio. This pushed the dollar index higher, leading to financial tightening and risk aversion.”

When the dollar soars, those with dollar borrowings and income in other currencies struggle to service their debts. According to Brickell, more than $17 trillion in dollar-denominated debt has been issued outside the United States. As a result, a stronger dollar tends to spark risk aversion globally.

The dollar index has gained 2.7% this month. Meanwhile, bitcoin fell 7.3 percent, its biggest monthly drop since December.

Noelle Acheson, former head of research at CoinDesk and Genesis Trading, said the People's Bank of China's intervention could be positive for the dollar, but stressed that such action was not certain.

Noelle Acheson said: "The PBOC has been signaling that the RMB target range is more flexible than in the past - so it will not intervene, especially if the RMB depreciation helps exports (exports are affected), and now China's priorities are different - And, the PBOC has been diversifying its reserves and can buy gold instead of more dollars.”

Last month, Yi Gang, Governor of the People's Bank of China, stated that China has basically stopped conventional intervention in the RMB, and that in the future, currency intervention may be gradually eliminated by gradually reducing the number and frequency of entering the market. However, Yi Gang emphasized that the central bank will retain The right to intervene in times of market volatility.