Dollar Hits 18-Month Highs as PBOC Defends Yuan Policy Ahead of EU Trade Talks

The US dollar extended its broad advance this week, with the euro sliding to 17-month lows against the dollar near 1.1200, putting the single currency on track for a 3.5% decline over five consecutive weekly losses. Europe's mounting fiscal concerns, particularly anxiety over France's sovereign debt load, combined with a rebound in oil prices, continued to weigh on the euro and hand dollar bulls fresh momentum. Investors are now focused on next week's US CPI and PPI releases as the next major catalyst.

Against that backdrop, China's central bank issued a detailed statement on its currency policy ahead of upcoming trade talks with the European Union. The People's Bank of China reiterated that the renminbi operates under a managed floating exchange-rate regime guided by a basket of currencies, with market forces playing the decisive role in rate formation. The PBOC explicitly said China will not seek trade advantage through currency depreciation and will not engage in competitive devaluation, and pledged to prioritize preventing large short-term swings, particularly rapid depreciation that could threaten financial stability. The statement acknowledged that in extreme scenarios, such as the tariff shock of April 2025, the central bank may deploy macroprudential tools, expectation management, and in extreme cases direct foreign-exchange intervention to correct self-reinforcing irrational depreciation expectations.

The Indian rupee also felt the pressure of the stronger dollar, falling 13 paise to close at 96.88 per dollar on October 8, with markets watching for potential Reserve Bank of India support. Analysts noted that a weaker rupee creates a macroeconomic headwind for India given its heavy dependence on imported crude oil, though export-oriented sectors including IT services firms such as TCS, pharmaceutical exporters like Sun Pharma, and commodity producers such as Tata Steel and SRF stand to benefit from currency translation gains. Gold, meanwhile, recovered from two-month lows near $4,066 but remained capped in the lower $4,100s, with a firm dollar and steady US Treasury yields near long-term highs limiting any sustained rally.