FX Weekly - New USD/CNY forecasts
Tariff de-escalation supports US dollar versus FX majors. This comes at a time when the dollar was already recovering. The recovery could continue, but we expect the long-term downtrend in the dollar to remain in place. We downgrade USD/CNY from 7.80 to 7.30 for end-2025.
Tariff de-escalation supports the US dollar
Over the weekend the US and China announced a significant de-escalation of the tariff war. This comes at a time that the US dollar recovery was already underway. Indeed, following the US-China truce, the US dollar index rose from 100.70 to 102, USD/JPY rallied to 148, EUR/USD declined to 1.11 levels and GBP/USD dropped to 1.32. These moves fall well within the counter trend moves in a longer-term US dollar downtrend. The recovery of the dollar could run until 150 in USD/JPY, 1.2850 in GBP/USD and 1.08 in EUR/USD without changing this dollar's long-term downward trend. We still expect the Fed to keep monetary policy unchanged this year, while market consensus is still for a total of 56bp of rate cuts. If the market moves towards our view, the US dollar is likely close to the levels that we expect to remain in place for the long-term decline of the dollar.
We downgrade USD/CNY
The announced tariff de-escalation has consequences for our forecasts in USD/CNY. China and the US announced a significant de-escalation in the trade war, bringing the bilateral tariffs of 145% (on Chinese exports) and 125% (on US exports) down to 30% and 10% respectively. They also established an economic and trade consultation mechanism, that allows the two countries to continue their negotiations (). As a result, there is now less downside risk to both economies and substantially weakening of the yuan is probably no longer necessary to dampen the impact of the tariffs. Having said that we still expect modest weakening of the yuan versus the US dollar reflecting the difference in monetary policy and different state of both economies. We downgrade USD/CNY from 7.80 to 7.30 for the end of 2025.
