(Yicai) May 19 -- Exporters and financial institutions remain cautious about the Chinese yuan despite it appreciating against the US dollar, even when the US Dollar Index entered an upward cycle.

The US Dollar Index declined 9.4 percent from January to April 21, the lowest this year. As a result, most Asian currencies’ exchange rates against the US dollar jumped between 5 percent and 10 percent, but the Chinese yuan rose only 0.1 percent in the period.

However, after the US Dollar Index rebounded from April 21, up about 2.6 percent since then, the Chinese yuan’s exchange rate against the US dollar accelerated its appreciation trend and is now up 1.1 percent since April 21.

On May 13, the People’s Bank of China set the Chinese yuan central parity rate against the US dollar at 7.1991, the first time below 7.2 since early April. Today, the PBOC lowered the central parity rate for the yuan again to 7.1916.

The US dollar is expected to continue depreciating against the Chinese yuan in the short term, and the PBOC will likely further adjust the Chinese yuan central parity rate to 7.17 or 7.18, Liu Jie, head of China macro strategy at Standard Chartered, told Yicai.

But the PBOC will not deliberately promote appreciation because the Chinese yuan exchange rate is still tied to the domestic economic situation and the progress of trade negotiations with the United States, she noted, adding that the strengthening of the yuan will remain limited in the future.

Among the investment banks that updated their forecast for Asian currencies, Goldman Sachs is the most optimistic about the Chinese yuan. It predicted that the US dollar to Chinese yuan exchange rate will drop to 7 this year if the countries reach a permanent trade agreement.

There is little possibility of a significant appreciation of the Chinese yuan, mainly because the threshold for the US Federal Reserve to lower interest rates remains high, according to financial institutions. The Fed’s first rate cut is expected in the last four months of the year.

However, as the European Central Bank and Bank of England are likely to trim interest rates before the Fed, the chances of the US dollar continuing to weaken are relatively low, the institutions noted.

Given the overall caution, Chinese exporters are not rushing to settle their foreign exchange trade, Yicai learned. However, Asian companies and institutions with excessive US dollar positions will eventually diversify their currency exposure, even though the US Dollar Index is unlikely to continue weakening in the short term.

Chinese exporters are not showing signs of concentrated foreign exchange settlements, as they think 7.2 is a good exchange rate, so they prefer to wait, the corporate banking head at a Chinese city-level commercial bank told Yicai.

Even though there have been some foreign exchange settlements recently, they are offset by Hong Kong-listed companies buying foreign exchange to pay out dividends in April and May, which is a dividend-paying season, Liu Yang, a forex expert, told Yicai. Firms still believe that the exchange rate will stabilize around 7.2 unless there is a major change in the trade situation, Liu added.

Chinese enterprises are actively looking for other ways to invest their US dollars, such as increasing investment in supply chain diversification and resource allocation through the Belt and Road Initiative, Zhang Meng, a macro and forex strategist at Barclays, told Yicai. Therefore, Chinese firms may continue to hold US dollar assets.

If the US dollar to Chinese yuan exchange rate continues to fall below 7.15 or even 7.10, about USD100 billion may be converted into Chinese yuan, which would further push the exchange rate down to around 7, Zhang predicted.

Market participants are paying close attention to the next phase of the trade agreement between China and the US, as uncertainties still exist. Australia and New Zealand Banking Group expects the final agreement to be reached before the 2026 US mid-term elections or before the 2028 US presidential elections.

There are still obstacles to further lowering tariffs, according to Liu Jie. Looking back on the trade war during US President Donald Trump’s first term, it took more than a year to reach an agreement, and it was just before the presidential election.

Editor: Futura Costaglione