Dollar Strong, Yuan Stronger: Why the Decade-Long Seesaw Between the US Dollar and the RMB Has Broken Down

On October 29, the central parity rate of the RMB against the US dollar was set at 6.7147, 18 pips firmer than the previous day, refreshing this year's high once again. Part of the reason was the Federal Reserve's overnight decision to hold rates steady, announced at 2 a.m. Beijing time, which sent the dollar index modestly lower.

In fact, the current round of RMB appreciation can be traced back to May 2025, but the decisive factor behind the gains is markedly different from the past decade. Especially this year, the RMB central parity rate has hit fresh year-to-date highs almost daily, even as the US dollar has remained strong and the negative China-US interest rate differential has kept widening.

The Decade-Old Seesaw Stops Working

After the Federal Open Market Committee's meeting on October 28, the dollar index slipped to close at 102.14. On Thursday morning, the dollar stayed soft while other non-US currencies firmed across the board. The RMB central parity rate stood at 6.7147, up 18 basis points from the previous day, and the onshore spot rate opened at 6.6640, slightly stronger than the previous close of 6.6669.

Since the start of this year, the RMB central parity rate has climbed from the "7 era" in January to around 6.7, with the onshore traded rate appreciating roughly 4% in the first three quarters. Over the same period, the dollar index, propelled by geopolitical conflicts, safe-haven demand and expectations of monetary tightening, dipped before rebounding strongly and has been oscillating around 102.

"A dollar index reading of 102 is a very strong level by any historical measure, and it is uncommon for the RMB to strengthen under such conditions," said Xie Yaxuan, head of the Research and Development Center at China Merchants Securities. He has long stressed three factors behind the RMB's moves: the dollar's strength, supply and demand in the FX market, and the central bank's policy intentions. From the "8.11" exchange rate reform in 2015 through 2025, the dollar's strength and the RMB's trajectory moved like a seesaw over nearly a decade. This year, that relationship has clearly been reversed.

"This year is clearly different: the dollar is strong, and the RMB is even stronger against it," said Guan Tao, chief economist at Huafu Securities. Many factors influence exchange rates at all times, he noted, but the focus of the market and the dominant driving force differ from phase to phase. In his view, the key factor this year is China's stronger-than-expected exports. "Everyone anticipated resilient Chinese exports, but no one foresaw double-digit positive export growth this year," he said.

Data from the General Administration of Customs show that China's goods trade surplus reached about 938.1 billion US dollars in the first three quarters of this year. A recent Morgan Stanley research report noted that China's share of global exports has risen 2 percentage points since 2017, with gains spread across most manufacturing sectors.

The Trade Surplus Is the Real Engine

Reflected in FX market supply and demand, the trade performance has directly driven this round of RMB appreciation. Guan Tao analyzed that since March 2025, spot and forward FX settlements and sales by banks (including options) have run a persistent surplus, and the onshore RMB spot rate bottomed out and rebounded from mid-April of that year.

Meanwhile, "contrary to the market's assumption that companies sell more dollars for yuan as the RMB appreciates, the reality is that settlement incentives have stayed basically stable while the willingness to buy foreign exchange has fallen sharply," Guan said. By his estimates, from May 2025 to August 2026, the average FX settlement ratio on receipts was 54.7%, only 0.8 percentage point higher than the average from April 2022 to April 2025, the previous depreciation phase; the average payment-to-purchase ratio was 55.4%, down 4.8 percentage points. In August 2026, the two ratios were 52.8% and 47.3% respectively, showing that both settlement and purchase motivations weakened, with the decline in purchase intent more pronounced. The main reason companies have been buying less FX lies in using freely held foreign currency for external payments and deferring payments for imports.

"Looking at banks' cross-border receipts and payments data on behalf of clients as well as settlement and sales data, the improvement in China's FX receipts and payments has mainly come from the goods trade account," Guan said. The trade surplus is money earned by domestic companies, and during the earlier period of one-way RMB pressure they accumulated substantial net long FX positions; they are now reducing the build-up of those positions by cutting FX purchases rather than by selling existing holdings.

Guan Tao emphasized that the exchange rate is an asset price with multiple equilibria: a large trade surplus can push the RMB up, while a negative interest rate differential can push it down, with different factors dominating at different times.

"The most fundamental support for the exchange rate is still economic fundamentals. Macro-wise, RMB appreciation tends to coincide with periods of very high goods export growth," said Zhao Qingming, vice president of the Huiguan Institute of Financial Research.

Caution Warranted on Calling a Trend Reversal

On where the RMB goes from here, institutions at home and abroad have offered forecasts. Goldman Sachs' latest projection sees the rate appreciating from 6.69 to 6.4 within a year. Its Asia macro team argued that the macro impact of currency strength may fade over time: on one hand, China's export mix is shifting toward higher-tech, higher value-added products that are less substitutable, reducing the macroeconomy's sensitivity to the exchange rate; on the other, as the share of RMB settlement in cross-border trade rises and export companies raise their FX hedging ratios, exchange rate sensitivity is further weakened. Overall, Chinese exports are expected to stay resilient even as the RMB gradually appreciates.

Deutsche Bank's baseline target for the RMB at end-2026 is 6.55; UBS sees the rate at 6.6 by year-end and 6.5 by mid-2027. HSBC raised its forecast in September, lifting its year-end RMB target from 6.75 to 6.65.

Zhao Qingming said the RMB still has room to appreciate this year, but the move should not be seen as a trend reversal. "The RMB exchange rate is a managed float."

"Whenever a consensus view forms, one must be wary of market surprises," Guan Tao said. "The exchange rate is inherently unpredictable, and two-way volatility is the norm."