The US dollar is strong and the RMB is depreciating, and the crypto market may be under pressure again

The RMB has been depreciating against the US dollar in recent months. When the Asian market opened on May 31, the onshore RMB/USD exchange rate fell to 7.0978, falling below 7.1 for the first time since late November. So far in May, the RMB has fallen by about 3%, the worst performance since September last year. Previously, in February, the RMB fell by 5% against the US dollar.

Investment banking giant Goldman Sachs said in a recent report that the yuan may face more room for depreciation despite policymakers' efforts to boost market sentiment.   Some observers believe that potential intervention by the People’s Bank of China to curb yuan volatility could accelerate the rise of the U.S. dollar index and exacerbate the crypto market’s woes.

Historically, a weaker yuan, one of the five currencies in the IMF’s Special Drawing Rights basket, is seen as bullish for fiat alternatives such as Bitcoin and gold, but the other side of the coin is a strong dollar. Some observers say the dollar is already on an upward trend, and further strength could lead to continued global monetary tightening and headwinds for risk assets, including cryptocurrencies.

The People's Bank of China (PBOC) regulates the RMB against a basket of currencies through a floating exchange rate system, with a daily fixed point or midpoint set every trading day to provide direction to the market. The currency basket reflects China's trading partners, with the United States being the largest and the US dollar having the highest weight at 19.83%. The 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 exchange rate allows the RMB to fluctuate 2% above or below the daily central parity rate, and the bank manages this range by actively buying and selling RMB. For example, if the USD/CNY is likely to rebound beyond the 2% limit, the central bank will sell USD and buy RMB to support the value of the RMB. At the same time, the central bank buys USD against other currencies to keep the proportion of USD in reserves stable and keep the RMB exchange rate basically stable at a reasonable equilibrium level.

Industry insiders said that this process inadvertently put upward pressure on the US dollar index, which is mainly based on the euro and the yen, leading to global financial tightening and triggering risk aversion.

“The rebound in USD/CNY means that the People’s Bank of China will sell the pair to maintain the 2% range and will have to buy dollars against other currencies to maintain a stable ratio of dollar reserves,” David Brickell, director of institutional sales at cryptocurrency liquidity network Paradigm, told CoinDesk. “This pushes up the dollar index, leading to financial tightening and risk aversion.”

When the dollar soars, those with dollar borrowings and income in other currencies have trouble paying their debts. According to Brickell, more than $17 trillion of dollar debt has been issued outside the U.S. As a result, a stronger dollar tends to spark risk aversion around the world.

The dollar index is up 2.7% this month. Meanwhile, bitcoin is down 7.3%, its biggest monthly drop since December.

Noelle Acheson, former head of research at CoinDesk and Genesis Trading, said intervention by the People’s Bank of China could be bullish for the dollar but stressed that such actions are not certain.

“The PBOC has been signaling that the RMB target range is more flexible than in the past – so it won’t intervene, especially if a weaker RMB helps exports (which are suffering), China’s priorities are different now – and the PBOC has been diversifying its reserves and could buy gold instead of more dollars,” said Noelle Acheson.

Last month, People's Bank of China Governor Yi Gang said that China has basically stopped routine intervention in the RMB, and may gradually eliminate currency intervention in the future by gradually reducing the amount and frequency of market entry. However, Yi Gang emphasized that the central bank will reserve the right to intervene during periods of market turmoil.