A powerful wave of capital is flowing out of a weakened dollar and into new strongholds, as the aftershocks of a dovish Federal Reserve and a dramatic political assault on its independence ripple across the globe.
In Asia, the Chinese yuan has surged to a ten-month high, while in the world of hard assets, gold is holding firm as a glittering fortress against institutional turmoil.
The Chinese yuan has emerged as a formidable beneficiary of the dollar’s decline, advancing to its strongest level since November.
The currency climbed as much as 0.1 percent to 7.1447 per dollar in the onshore market, bringing its appreciation for the year to roughly 2 percent.
This ascent is being powered by a potent cocktail of factors. The primary catalyst is the dollar’s weakness, a direct result of Federal Reserve Chair Jerome Powell’s signal from Jackson Hole last week that an interest-rate cut could be on the table as early as September. T
his has been amplified by a powerful rally in local Chinese equities, which is driving significant capital inflows ahead of the country’s September 3 ‘Victory Day’ parade.
“Over the past few weeks, we have also observed net foreign equity inflow into China,” Christopher Wong, a foreign-exchange strategist at Oversea-Chinese Banking Corp. in Singapore, told Bloomberg.
These factors and the Fed about to resume rate cuts should continue to bode well for the yuan.
The People’s Bank of China has added its own muscle to the move, strengthening its daily reference rate, or “fixing,” for the currency.
The growing optimism is palpable, with analysts at major institutions like Deutsche Bank AG and UBS Group AG now raising their yuan forecasts, citing the prospect of a US-China trade agreement.
The golden fortress
While the yuan is rallying on economic and policy shifts, gold is holding its ground for a far more ominous reason: a direct political assault on the independence of the US central bank.
The precious metal is trading steadily above $3,390 an ounce after advancing 0.8 percent on Tuesday, a direct reaction to President Donald Trump’s efforts to oust Federal Reserve Governor Lisa Cook.
The concern roiling the market is that if the president—a vocal advocate for aggressive interest-rate cuts—succeeds in removing Cook, it would give him an opportunity to secure a majority on the Fed’s Board of Governors.
This could lead to a premature cutting cycle, one that could fan the flames of inflation and erode confidence in the central bank itself—a perfect storm for a safe-haven asset like gold.
The precious metal has already climbed by more than a quarter this year on the back of geopolitical and trade tensions.
While it has been in a holding pattern since peaking above $3,500 an ounce in April, the latest institutional turmoil has reinforced its appeal.
It’s a sentiment shared by major banks like Citigroup Inc. and the wealth management arm of UBS Group AG, who see more gains on the horizon for the ultimate store of value in an increasingly uncertain world.
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