US Dollar Soars as China Devalues Yuan, Looks Ahead to Fed-Speak

The US Dollar outperformed in overnight trade, rising as much as 0.4 percent on average against its top counterparts. The move reflected the ripple effects of an unexpected move by the People’s Bank of China(PBOC) to devalue the official reference rate for the Yuan by 1.9 percent, the most on record. The currencyplunged against the greenback, pushing the latter currency higher across the board.

The PBOC billed the move was a one-off realignment, saying the Yuan’s effective exchange rate had become “relatively strong” compared with market expectations. The gap “undermined the market benchmark status” of the reference rate, according to a spokesman for the central bank.

Beijing expects the devaluation to “help enhance the market orientation” of the reference rate, which it sees as part of the broader effort to increase Yuan flexibility. Officials also said they will expand FX trading hours to promote the establishment of a single on- and off-shore exchange rate.

Chatter around the financial markets reflected suspicion that the devaluation was designed to boost exports after data released over the weekend showed overseas sales fell 8.3 percent in July, the most in four months. China had been supporting the Yuan to discourage capital outflows and promote the currency’s use on global markets, shrinking FX reserves by nearly $300 billion over the past 13 months in the process.

Looking ahead, Augusts’ German ZEW Survey of investor confidence headlines the economic calendar in European hours. The forward-looking Expectations index is seen edging higher to 31.9 from the 29.7 reading recorded in July, snapping a four-month losing streak. An upbeat outcome seems unlikely to offer a lasting boost to the Euro however considering its limited implications for near-term monetary policy as the ECB’s QE effort continues.

Thereafter the spotlight will shift to Fed-speak once again, with scheduled commentary from Bill Dudley, the President of the central bank’s New York branch, set to cross the wires. Traders will be keen to see if the influential FOMC member’s remarks support analysts’ bets on a rate hike in September. If they materialize, such comments may boost the US Dollar.