The Federal Reserve announced on December 18th, local time, that it would cut the target range for the federal funds rate by 25 basis points to between 4.25% and 4.50%, in line with widespread market expectations.

Federal Reserve Chair Jerome Powell held a press conference on the same day to discuss the rate cut decision. He stated that the Fed should be "more cautious" when considering future adjustments to the policy rate.

Powell noted that the December rate cut decision was more challenging but was the "right decision." He indicated that whether the Fed will cut rates in 2025 will depend on future data rather than current forecasts, and the Fed will consider further rate cuts only after seeing improvements in inflation.

The Fed also released its latest economic outlook, predicting that the U.S. economy will grow by 2.5% this year and 2.1% next year, which is an upward revision of 0.5 percentage points and 0.1 percentage points, respectively, from the September forecast.

The unemployment rate is expected to be 4.2% this year and 4.3% next year, both lower than previous predictions. The inflation rate, measured by the personal consumption expenditures (PCE) price index, is forecast to be 2.4% and 2.5% for this year and next year, respectively. The core PCE inflation rate, which excludes food and energy prices, is projected to be 2.8% and 2.5%, both exceeding the long-term inflation target of 2%.

Widespread opinion holds that the fundamentals of the U.S. economy are strong, and inflation expectations are rising, which reduces the necessity for further rate cuts by the Fed. The latest dot plot shows that out of the 19 Federal Open Market Committee (FOMC) members, 10 believe the Fed may cut rates only twice next year, down from the four cuts anticipated in September.

  The offshore yuan has fallen below 7.32.  

After the Federal Reserve announced the interest rate cut, the U.S. Dollar Index surged straight up, with the dollar soaring by 1.22%, reaching its highest level since November 2022, a rise that stunned the world.

On Wednesday, major global currencies such as the euro, pound, and yen saw significant declines against the dollar.

The offshore yuan fell sharply against the dollar, breaking through the 7.30, 7.31, and 7.32 levels consecutively, hitting a low of 7.32639, the weakest since November 3, 2023.

The onshore yuan against the dollar broke through the 7.29 level, falling to 7.2981, marking its lowest point since November 3, 2023.

The central parity rate of the yuan against the dollar was set at 7.1911, a depreciation of 31 basis points from the previous day's rate of 7.1880.

  Under pressure but maintaining a stable foundation  

This year, Asian currencies have generally been under pressure.

The Japanese yen has depreciated by more than 8% against the dollar over the past year, while the euro has depreciated by about 4%. In contrast, the renminbi has depreciated by only 2% against the dollar. In fact, the renminbi remains overvalued against a basket of currencies, with the CFETS basket currency index at 99.71, which is relatively high in recent years and was below 98 at the beginning of the year.

The renminbi exchange rate has a solid foundation for maintaining basic stability. The resilience of the foreign exchange market has significantly strengthened, and year-end corporate foreign exchange settlement is providing support to the renminbi exchange rate.

After years of development, participants in China's foreign exchange market have become more mature, and the concept of risk neutrality has notably increased. The proportion of foreign trade enterprises engaging in foreign exchange hedging and cross-border renminbi settlement has risen, allowing market participants to view renminbi exchange rate fluctuations more rationally, thereby enhancing the resilience of the foreign exchange market.

Additionally, the end of the year is traditionally a peak season for corporate foreign exchange settlement in China. Over the past five years, the renminbi has generally appreciated against the dollar in December, and many experts believe that this year-end settlement effect is likely to continue. According to statistics, the trade surplus for the first eleven months of the year expanded by 12.9% compared to the same period last year.

Past experience also shows that the central bank has the capability to maintain exchange rate stability, and recent signs do not indicate a laissez-faire attitude towards depreciation.