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S&P: Yuan weakness driven by market forces; outlook hangs on trade tensions

The Chinese yuan's depreciation below 7 per dollar is driven by market forces and is in line with the Asian country's foreign exchange policy framework, even though the timing of the move may raise some concerns, S&P Global Ratings said Aug. 6.

China has allowed greater flexibility for the yuan against the dollar for some time, and mounting currency depreciation pressure can be attributed to higher trade risks, said Shaun Roache, S&P Global Ratings' chief economist for Asia-Pacific.

As part of China's exchange rate policy, the focus is on the stability of the yuan versus the trade-weighted basket, in which the U.S. dollar carries a 27% weight if the pegged Hong Kong dollar is also included.

The yuan breached the 7.0 psychological barrier for the first time in over a decade on Aug. 5, raising concerns that China is weaponizing its currency amid the ongoing trade war with the U.S. The move prompted the U.S. to label China a currency manipulator and measures from the People's Bank of China to stabilize the yuan.

The yuan's outlook will mainly depend on trade and technology tensions with the U.S., but S&P Global Ratings does not expect a substantial yuan depreciation. If yuan weakness persists, exchange rates across Asia-Pacific will come under depreciation pressure.

The Chinese yuan weakened 0.4% to 7.0458 per dollar around 8 a.m. ET on Aug. 7.

"Renminbi depreciation can raise concerns about large capital outflows and financial instability but we think these risks are manageable," the rating agency said.