Currency Tool Employed Again

Peso and yen are rescued by a friend, Currency tool matters in the end.

Yuan has become stronger in three years amid tariff debate[1]. What is interesting is that there is conspicuous absence of Chinese central bank intervention to depreciate Yuan deliberately. It often happened in the past. Undervalued Yuan has always been an issue raised by the USA in bilateral talks. Since president Trump's last visit to China, we have not seen yet any Chinese intervention to devalue the Yuan. Appreciation of Yuan is at the heart of reshaping the global trading system.

Economist Stephen Miran, who is one of Fed's governors, argues in his policy paper titled "A User's Guide To Restructuring The Global Trading System" ( published by Hudson Bay Capital in November 2024) offers some tools to reshape global trading order[2]. One of the tools is tariff. Tariff will help addressing the budget deficit America suffers and make depreciation of Yuan untenable. Miran argues tariff will not drive up the prices if the tariffed /exporting country depreciates its currency to the full magnitude of the tariff. Tariff is not inflationary for America in this case. Usually individuals, other countries buy foreign assets with their foreign currency holdings. US treasury assets are one of them. China has a closed capital market and Chinese govt restricts investment abroad. So holders of foreign currency in China are forced to invest in less productive and risky assets like real estate that accumulated huge bad debt. Miran argues continuing currency devaluation under capital controls will not sustain amid high tariffs. So there will be great capital flight from China. And it will force the Chinese central bank to raise interest rate , leading to appreciation of Chinese currency. The plus side of tariff war is that the US govt will get revenue without incurring the inflation. However, the US may lose revenue if the partner country does not depreciate the currency and an ensuing inflation may be expected.

So far we have seen that the US Supreme Court made the US tariff useless and ordered to refund $100 billion tariff revenue. However, reciprocal tariff is replaced by forced labor tariff under trade act that allowed the US president to do so. Tariff reality still prevails. Yuan depreciated immediately following the months tariff came into affect. But it started to appreciate since then. Meanwhile, US dollar weakened till the US-Iran war broke out.

Another tool Miran advocates is the currency tool. It has two approaches: the multilateral approach and the unilateral approach. In the multilateral approach, the US sits with major trading partners and convince them to appreciate/strengthen their currencies and to depreciate/weaken the USD. This starts to happen when they start to sell USD from their forex reserve. The US starts to buy those dollars and issues new treasury security with duration of 100 years. In addition, the US sells those bonds to friendly countries who need security assistance in troubled waters and territories. By the way, the century bonds will replace the short and medium term bonds,easing the burden of the Fed to make huge interest payments and improving the budget deficits. Here the US projects the global security assistance as public good. And buying the century bond ,you are actually paying for that public good. In addition, holders of the century bond will enjoy favorable tariffs in the US market while the hostile partner will face a different kind of tariff. This multilateral currency approach has a precedent. In 1985, the US,France,UK,Germany and Japan met at the Plaza hotel and agreed to devalue the USD.

The unilateral approach reveals the leverages the US has to reshape the global trading system.It emerges when multilateral approach fails(many countries do not give consent to devalue dollar). One of the leverages is the International Emergency Economic Powers Act 1977 that allows the US president to halt and limit transfers of credit, payments or securities internationally. The US could hold part of the interest payments on treasury security in a bid to make USD unattractive for using it as reserve currency. This will lead countries to lower the size of their USD holdings, creating a depreciation pressure on USD.

Another leverage is the reserve accumulation,which means the US will buy other currencies in a bid to increase the demand of other currencies provided that the Fed prints and supplies the much needed USD.

Like tariff, currency tool has already been employed.In October 2025, we saw the USA announced a currency swap line worth $20 billion to rescue the Argentine peso ,halting depletion of forex reserve of the Argentine central bank. The US treasury secretary urged US banks and investment funds to invest more in Argentina. This is the first time,[reserve accumulation] is employed in tariff debate. This time it is used to rescue an ally Argentina to curb influence of China,which has also given a $18 billion currency swap line with the Argentina. Earlier, Argentina had chosen refurbished F-16 over JF-17 and J-10C offered by China for its Air Force. Here security is being projected as public good and currency is used to aid ally through security umbrella[3].

A week ago US Federal Reserve intervened again to rescue Japanese Yen. Yen witnessed huge depreciation pressure, but Fed's purchase of $8 billion of Japanese Yen helped the Japanese currency to gain some value. Earlier US intervention took place in 2011 after earthquake and tsunami in Japan[4].

Now think there comes a moment when this same reserve accumulation of the currency tool is being used to punish behavior of a rival. In fact, Federal Reserve governor Stephen Miran depicted such scenario in his paper where the US govt requests the Fed to print $1 trillion in a bid to purchase Yuan so that it appreciates .

However, recent appreciation of Yuan does not reflect that reality. It is merely a consequence of internal dynamics that the Chinese regulatory authority allowed to happen.

So far we witnessed that tariff and currency tools of the trade debate [are] applied. In terms of revenue, tariff may fail to bring some change but it shaped several Free Trade Agreements. At the same time, use of currency tool stalled free falling of several currencies and consolidated few security agreements. It is true that tariff debate gave rise to trade related uncertainties and hiked inflation in some parts. And in future,reserve accumulation may be employed by big trading partners for harmful purposes. We have to be cautious of intentional use of major currencies to influence other currencies through currency tool.

References:

[1] "Yuan Hits Strongest Levels In Years As Tensions Grow", The Star,August 06,2026, https://www.thestar.com.my/business/business-news/2026/08/06/yuan-hits-strongest-level-in-years-as-tensions-grow

[2]"Reshaping Global Trading System: What Lies Ahead",https://hoquestake.blogspot.com,April 04,2025,https://hoquestake.blogspot.com/2025/04/reshaping-global-trading-system-what.html?m=1

[3]"Tariff Debate Continues ",https://hoquestake.blogspot.com,November 03,2025,https://hoquestake.blogspot.com/2025/11/tariff-debate-continues.html?m=1

[4]"US Treasury Intervenes To Support Yen After Japan Steps In,FT Reports",Fabiola Arámburo and David Lawder ,August 01,2026. https://www.reuters.com/world/asia-pacific/us-treasury-undertakes-intervention-yen-market-ft-reports-2026-08-01/

Weak Rupee,Strong Yuan And Bangladesh

Bangladesh faces opportunities and challenges When two currencies see major changes.

Opposing trends in the currencies of Bangladesh's two largest trading partners have implications for Bangladesh. In one year, Chinese Yuan appreciated around 5% against the US Dollar(USD) while Indian Rupee depreciated around 10% against USD. China and India are Bangladesh's biggest import sources. In 2024-25,Bangladesh imported $18.19 billion worth of goods from China. Meanwhile,Bangladesh imported $9.69 billion worth of goods from India in the given period. Bangladesh's export to China and India during this time were less than $1 billion and $1.57 billion respectively. Bangladesh faces a combined trade deficit of around $25 billion with the two countries. So exchange rate changes of Yuan and Rupee inevitably influence Bangladesh economy.

Rupee's sharp depreciation was more pronounced in the first six months of this year in the wake of war in the Middle East. Oil price increase raised significantly the import bills,increasing demand for dollar. Inflationary pressure lowered purchasing power of Rupee and made other currencies more attractive. Current account deficit and foreign investors' withdrawal of money from Indian market in a bid to invest in dollar-denominated assets led to large depreciation of Rupee. Fed's decision to not lower the policy rate and uncertainty stemming from war in the Middle East strengthened USD against other currencies (see "Why Is Indian Rupee Falling Against The US Dollar?",Bajaj Finance Limited,June 06,2026,https://www.bajajfinserv.in/usd-vs-inr-why-indian-rupee-falling-against-us-dollar).

Yuan's appreciation is attributed to China's huge external trade surplus, export competitiveness and internationalization of Yuan. Moreover, Chinese capital market is closed and investors cannot invest abroad on foreign stocks in times of uncertainty. So extra wealth generated in the economy gets invested into Yuan-denominated assets.China's diversified energy mix also played a role in the appreciation of Yuan. Recent trade understanding between China and the USA also made the Yuan stronger(see "Global Banks Raise Yuan Forecasts, Fuelled By China's Export Strength And Stable Us Ties", Reuters, May 18,2026,https://www.reuters.com/business/finance/global-banks-raise-yuan-forecasts-fuelled-by-chinas-export-strength-stable-us-2026-05-18/l).

Rupee's 10% depreciation poses serious risks to Bangladesh's RMG export. India's recent final talk on FTA with Britain further amplifies the risk. Depreciated Rupee plus FTA have the potentials to wipe out the Bangladeshi RMG items from British market. Furthermore, competitiveness gained through this unprecedented depreciation makes India an attractive destination for relocating manufacturing centers from China,where rising cost and trade restrictions on Chinese goods make relocation of some manufacturing units inevitable. Indian economy can absorb the transitory effect from 10% depreciation. So such depreciation poses real challenges to Bangladeshi export sector, where persistent high inflation keeps the policy rate high and shrinks subsidy.

Appreciation of Yuan brings opportunities as well as challenges. As Chinese RMG items become less competitive, some orders may shift to Bangladesh. In addition, as imported goods become cheaper in China, Bangladesh's RMG export to the country may rise. There is a growing pressure from Bangladesh to narrow the trade balance, which is tilted in favor of China. The pressure plus the strong Yuan will play a conducive role to increase Bangladesh's export to China. Meanwhile, strong USD and Yuan pose challenges too. Bangladesh has long been mulling financing the public and private projects in Yuan as USD credit becomes more costly. Strong Yuan also makes Yuan credit costly. Chinese foreign investment also faces some obstacles as Yuan credit relatively gets costlier than before. Moreover, investment bankers think that People's Bank of China may raise the required reserve ratio for foreign currency deposit accounts, curtailing dollar liquidity into Chinese market(see "Chinese Yuan Rises To Highest Level Against Basket Since 2022",Jacob Gu,Bloomberg News, June 01,2026,https://financialpost.com/pmn/business-pmn/chinas-yuan-rises-to-highest-level-against-basket-since-2022l). This may put an obstacle to Chinese investors planning to implement their investment projects abroad in USD. Only time will tell whether opportunities outweigh the challenges or vice versa.

Bangladesh can ill afford further shrinking of its export income. Already inflation in advanced economies plus tariff debate made a dent into our export earnings. Depreciation of Rupee and appreciation of Yuan bring serious issues to competitiveness, export market and foreign financing of local projects. Country is experiencing serious inflation so further depreciation of Taka is not plausible right now. Contingency plans need to be chalked out so that risks from behavior of two currencies do not make inroads into export earnings.

Macroeconomy Amid Trade War

Clashes of the titans in trade May prolong the struggling state.

Bangladesh Bureau of Statistics (BBS) divulged that inflation again increased to 9.87% in May. It is highly likely to see another round of hike in policy rate in the next monetary policy statement. A 1% increase will make the policy rate 9.5%,narrowing the gap between current inflation rate and policy rate. Fitch ratings downgrade of Bangladesh's credit rating will make foreign credit harder for the public and private sector. Bangladesh Finance Minister is optimistic about getting the third instalment of IMF credit package. IMF in its last board meeting in May cleared credit package for Ecuador.

Things turn out to be difficult for the government. Revenue shortfall,dependence on domestic borrowing from banks,lack of foreign credit and FDI will cause further depreciation of taka against US dollar. Central bank's stated policy of containing the inflation rate to 7.5% may be prolonged and face serious hurdle in the wake of trade war between China and USA.

So far US federal fund rate is being stuck at 5.33%. Federal Reserve System has no intention to lower it as it sees inflation will take time to ease. Moreover, lowering the interest rate will raise the US treasury bond price,facilitating the process of ditching US treasury assets by govts not happy with US policies. Meanwhile Chinese policy rate is now 3.45% and it may go down further. It will make Chinese goods even cheaper. Let's draw a rough sketch on how the macroeconomic situation will prevail in the country given different policy rates in USA and China and trade tensions between the two countries.

Fed funds rate:5.33%
Chinese policy rate: 3.45%
If the current policy rates prevail and the countries engage in tariff and trade war, then Bangladesh has to further depreciate the currency since value addition condition to US-bound goods will also get tougher. However, special treatment to US cotton made garments may give some favor. But to meet the extra cost emanating from trade restrictions, Bangladesh has to depreciate its currency further to give the exporters some kind of favor. On the other hand, Bangladesh has to continue its contractionary policy for a longer period to mitigate the inflationary pressure.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will be hard to get foreign credit and assistance in US dollar. Dollar-based investment and return will be lucrative in the West and few will be reluctant to invest here where timely repatriation of profit is under scanner. Meanwhile, Chinese credit will be cheaper. Both the government and private sector will hinge on Chinese Yuan,easing the pressure on US dollar. Weakening of Yuan may increase Chinese share of EU export market, putting pressure on Bangladesh's export to EU. EU will unlikely to get tougher on China in the wake of a trade war in a bid to neutralize it against Russia. In this situation, taka has to be depreciated more than the previous scenario against the stronger US dollar and to stall the dollar flight. Amid tight monetary policy, the central bank may resort to money supplying measures,further worsening the inflation. More rise in policy rate and delay in stabilizing the macroeconomy. More reliance on Chinese credit and deepening trade ties between China and Bangladesh.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
It will help Bangladesh getting foreign credit in US dollar. Less pressure on forex reserve and taka. Ongoing monetary policy may go as usual and goals may be attained in the anticipated time. No large depreciation of taka is needed to make the goods more competitive. Easing of import restrictions on capital machinery may increase economic activity. Cheaper foreign goods/ingredients may ease inflationary pressure. Economic recovery will be early. This is an ideal case for Bangladesh as both the Yuan and US dollar credit will be available at an affordable rate in the wake of a trade war. Bangladesh may have to convert a significant amount of its US dollar assets into other IMF SDR currency or to procure gold if there is further unease in the relations between Bangladesh and USA.

Since access to foreign credit gets tougher for Bangladesh, Bangladesh has to prolong its austerity measures. In all three cases ,we see that Bangladesh has to continue raising policy rate and depreciating its currency. Likelihood of the occurrences of the cases would further depict a grimmer picture . Most optimistic scenario/case(the last one) for Bangladesh is less likely to happen. In a heated trade war,US will not lower the policy rate. The second one (worst for Bangladesh) will have a better chance to emerge than the first one. We have to further tighten our belt.