It seems like China, ground zero for the coronavirus global pandemic, has been relatively unscathed by the public health crisis. Beijing was one of the few major economies to record growth in 2020, thanks to ultra-aggressive fiscal and monetary support. For the last several months, the pertinent metrics of a healthy economy have been improving as expected. During this period, a surprising trend has been the appreciation of the yuan, climbing to its highest level against the U.S. dollar in 30 months. Chinese policymakers have allowed the yuan to strengthen – for now – and this could have ramifications for the United States in 2021. So, what does a strong yuan mean for America and the rest of the world?
A Tale of Two Currencies
At the height of the COVID-19 pandemic, the yuan had slumped about 2.5% to as low as 7.718 per U.S. dollar. Throughout the trade war with President Donald Trump, the yuan had faced weakness, hovering around the 7 mark, forcing the Treasury Department to label China as a currency manipulator. By June, the yuan peaked and started to advance against the greenback, hitting a near three-year high of 6.51 per dollar.
The U.S. dollar has endured an inverse performance. After soaring to a four-year high of 103.00, the U.S. Dollar Index (DXY), which gauges the greenback against a basket of currencies, cratered about 15% and slipped below the 90.00 threshold.
What does 2021 have in store for both currencies? Unless President Xi Jinping's merry band of Comm...