(Yicai) May 6 -- American stocks and the US Dollar Index rebounded during China’s recent May Day holiday, while the Chinese yuan also strengthened, reflecting improving investor sentiment despite ongoing tariff tensions.

"Now that there’s a reversal, the market is showing that when the trade war starts, US stocks, bonds, and the dollar fall, but when negotiations take place, they can all rise," Liu Yang, general manager of the financial markets division at metal producer Zheshang Development Group, said to Yicai.

Liu noted that the renminbi is unlikely to weaken merely because the dollar Index (DXY) is appreciating. Instead, the redback is more likely to strengthen alongside the dollar against a broader basket of currencies.

As of last week, the S&P 500 had posted gains for nine consecutive sessions—its longest winning streak since 2004—essentially erasing losses incurred since early April. Meanwhile, the DXY halted its previous decline, supported by easing tariff tensions after the Trump administration waived its 25 percent tariffs on auto parts from Canada and Mexico.

Fresh US economic data also offered reassurance. Real GDP in the first quarter fell 0.3 percent year-over-year, in line with market expectations. Goldman Sachs reported that net exports dragged GDP down by 4.8 percentage points—the largest impact on record—as companies accelerated imports in anticipation of higher tariffs.

Labor market data exceeded expectations. In April, US non-farm payrolls increased by 177,000—well above forecasts—while the unemployment rate held steady at 4.2 percent, bolstering confidence in the resilience of the American economy.

Negotiation Tactics

There is growing awareness that 'reciprocal tariffs' are being used more as a negotiating tactic, said David Scutt, Asia Pacific market analyst at StoneX. He added that while markets expect the US and some Asian countries to reach agreements soon, it may take longer with countries running large trade surpluses, such as those in Europe. Overall, he said, market optimism is growing.

These conditions have proved favorable for both the offshore yuan and Chinese assets. After a joint decline in mid-April—triggered by the initial shock of tariff hikes—both the DXY and the yuan have rebounded amid growing optimism about trade talks.

Liu from Zheshang added that global capital has returned significantly to US assets. As a result, American equities have risen, the 10-year Treasury yield has reached a minimum of 4 percent, and the DXY has at times climbed above the 100 mark.

Much of this capital has flowed from the Japanese bond market. Meanwhile, the role of the Japanese yen has shifted from that of a safe-haven currency to a funding currency, contributing to a rally in the USD/JPY exchange rate, which has surpassed 145.

During this rebound, the dollar has appreciated against a basket of currencies—including the yen and the British pound—while the yuan has remained steady. Earlier declines in the yuan were largely due to its weakness against the euro; during that period, the DXY fell nearly 10 percent against the euro, while the yuan dropped nearly 5 percent versus the currency of the European Union.

According to Liu, the yuan is now expected to begin appreciating against the greenback. Looking ahead, the direction of tariffs and the progress of trade negotiations will remain key drivers of market dynamics, the forex expert added.

Editor: Emmi Laine