Following a fatal fire in Urumqi in the far west of the country, the COVID protests have erupted across China and extended to numerous cities. On Sunday night in Shanghai, there were clashes between hundreds of protesters and police.
Anxious investors were drawn to the safe-haven greenback on Monday as protests against COVID restrictions in China raised uncertainty and damaged confidence. This caused the yuan to weaken.
In early Asian trading, the dollar increased 0.76% to 7.2456 yuan offshore. The Australian dollar, which is frequently used as a liquid substitute for the yuan, declined by 0.61% to $0.6714, while the New Zealand dollar sank by 0.5% to $0.6216.
"That's a new layer of concern in China that needs to be watched closely," Rodrigo Catril, a currency strategist at National Australia Bank (NAB) said. "Certainly at the start of the week, it will set the tone. And I suppose what will be the focus as well, will not only be the imposition of restrictions that China may introduce if any, but the level of contagion as well."
"If the RRR cut is the only monetary policy tool that the PBOC is going to implement, it may not lead to a significant increase in bank lending," Iris Pang, chief economist for Greater China at ING said. "Companies are currently facing weaker retail sales from a higher number of COVID cases and falling home prices from unfinished home projects."
China's central bank announced on Friday that it would reduce the reserve requirement ratio (RRR) for banks by 25 basis points (bps), starting on Dec. 5. This move is an effort to support China's faltering economy, which has struggled under the country's severe COVID controls.
The sterling was down 0.24 percent at $1.2060, while the euro dropped 0.25 percent to $1.0377. The Japanese yen decreased by almost 0.1% to 139.27 per dollar.
The recent changes in China have halted the U.S. dollar's slide, which had been easing over the previous few weeks on expectations that the Federal Reserve will soon decrease its rate hike pace. This expectation was backed up by the Fed's November meeting minutes, which were issued last week.
However, as investors seized on indications of a shift in the Fed's aggressive policy stance, it is still on course for a monthly fall of about 5%, the biggest in 12 years. At a Brookings Institution talk on Wednesday, Fed Chair Jerome Powell is scheduled to discuss the prospects for the U.S. economy and the labor market. His remarks are likely to shed further light on the direction of U.S. monetary policy.
