China and Japan are actively defending their currencies against the rising US dollar, sparking inflation concerns. Both the yen and yuan have depreciated significantly due to market expectations of prolonged higher interest rates by the US Federal Reserve.
In response, China’s central bank is providing robust guidance through its daily yuan reference rate to prevent excessive weakening. Japan has issued a stern warning against rapid yen depreciation, signaling readiness for intervention.
Despite these efforts, doubts linger about their effectiveness, especially if the Federal Reserve maintains a hawkish stance or China’s economic recovery remains sluggish. The strong US dollar also affects European currencies, with the euro and pound hitting their lowest levels since June, raising concerns of quicker rate cuts by eurozone and UK central banks to counter rising borrowing costs. Investors globally watch closely as central banks and the Federal Reserve navigate these currency dynamics, with potential implications for inflation and future monetary policies.
