China's yuan climb sets the stage for emerging-market currencies rally

China tightened the leash on its currency and let the yuan rise sharply against the dollar on September 9, signaling what looks like a new phase in Beijing’s foreign exchange playbook.

The People’s Bank of China set the yuan’s daily reference rate at its firmest since November 2024, abandoning months of effort to prop it up beyond market levels.

This development, according to data from Bloomberg, is being felt far outside China’s borders as traders across the globe reposition around the yuan’s climb.

The yuan is up more than 2% this year against the U.S. dollar, snapping a three-year losing streak. Hedge funds have started piling into bullish yuan options, with bets placed on the currency heading below 7 per dollar before the end of the year. It was around 7.12 last Friday.

EM currency index reacts to the yuan move

Eric Fine, a portfolio manager at VanEck Associates in New York, said the direction of the yuan plays a dominant role in the value of emerging-market currencies. “China’s yuan is the key currency cross for most EMs; they trade more with China than they do with the US,” Eric said. “The winners are all EMs.”

The MSCI Emerging Markets Currency Index, which tracks a basket of EM currencies, had dropped 0.3% this quarter. It had posted gains in the previous two quarters as traders responded to shifting Federal Reserve policies.

For 2025, the index is still up about 6.8%. The movement of the yuan is directly tied to the performance of this index, with a 30-day correlation of 0.59 recorded at the end of August, the highest since May 2024.

Data reviewed over the past twelve months shows that when the yuan moves 1%, the Thai baht, Malaysian ringgit, Chilean peso, Mexican peso, and Brazilian real tend to move right along with it. That tight relationship is now back in focus as Beijing gives the yuan more breathing space.

This is a reversal from the beginning of the year when the PBOC was actively holding the line, managing the yuan through persistent dollar pressure and fears around U.S. tariffs.

Eric noted that there had been “market speculation” earlier in the year about China devaluing its currency in response to economic pressure from President Trump’s trade stance. That didn’t happen.

Instead, VanEck has increased its position in local-currency EM bonds, reducing its exposure to dollar-denominated notes.

China links yuan strength to broader global strategy

Brad Bechtel, global head of FX at Jefferies, said the strengthening of the yuan could be tied to ongoing trade talks between Washington and Beijing, and may also reflect “international pressure to let the renminbi strengthen.”

Brad said that letting the yuan appreciate gives room for other Asian currencies to move up as well, which in turn gives their central banks more flexibility on monetary policy.

Brad also added that the impact won’t stop in Asia. The appreciation will likely “spill over to the broader EM space,” with other emerging-market economies feeling the ripple effect, especially those whose economies depend on Chinese demand for goods, services, or raw materials.

Christopher Hamilton, head of client investment solutions for Asia Pacific ex-Japan at Invesco, described the bigger regional impact: “When CNY strengthens, EM Asia FX and local debts get permission to breathe.”

Christopher said that a stronger yuan supports the de-dollarization trend gaining ground in Asia.

China has been pushing hard to boost the yuan’s global role. As skepticism grows around U.S. economic leadership, Beijing sees an opening.

The country is now running aggressive campaigns to increase yuan use in international settlements, and a strong yuan makes it easier to sell that narrative to trade partners who are tiring of dollar dependence.

Last year, China was the second-largest trading partner of developing economies in Asia, making up 9% of their total trade, based on IMF data. The yuan acts as an anchor for those markets. And with Beijing now letting it climb, traders are watching closely for what this means for crypto markets, commodities, and EMFX bonds.

The yuan still trades in a 2% daily band from the central reference point set by the PBOC. But that band doesn’t limit impact. Since July, the PBOC had been nudging the currency higher than traders expected.

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