China Halts Yuan Rally as Global Rate Expectations Shape Currency Movements in February
By Rae Wee | February 27, 2026
SINGAPORE – The Chinese yuan’s recent rally came to a halt this week as the People’s Bank of China (PBOC) took measures to slow the currency’s rapid appreciation. Meanwhile, shifting expectations around global interest rates have driven significant movements in other major currencies throughout February.
PBOC Steps In to Slow Yuan Appreciation
On Friday, the PBOC announced it would scrap the foreign exchange risk reserves for some forward contracts, an action widely interpreted as a move to encourage more dollar buying and temper the yuan’s swift gains. The decision was accompanied by a weaker-than-expected yuan midpoint fix, causing the onshore yuan to fall 0.2% to 6.8553 per U.S. dollar. This ended a 10-day winning streak for the currency, which has still risen approximately 2% so far in 2026, following a robust 4% gain in 2025. Analysts at Maybank noted, “It is clear that the PBOC wants the yuan appreciation pace to slow.” They added that the recent strengthening of the yuan may be linked to China gaining leverage after the U.S. Supreme Court struck down tariffs imposed during the Trump administration.
Australian Dollar Surges on Hawkish RBA Outlook
The Australian dollar continues to be a strong performer among major currencies. It rose 0.3% on Friday to $0.7127 and is on track to post a monthly gain exceeding 2%. Year-to-date, the Aussie has surged over 6%, making it the best-performing G10 currency so far in 2026. Market optimism surrounding Australia’s economic fundamentals fuels expectations that the Reserve Bank of Australia will adopt a more hawkish stance, potentially leading to interest rate hikes. This contrasts with last year’s broader focus on central bank rate cuts, as highlighted by Sim Moh Siong, currency strategist at OCBC, who said, “Last year was about which central banks will cut rates and by how much. This year, the focus has shifted towards which central banks will lead in terms of hiking rates.”
Yen Faces Challenges Amid Political Uncertainty
The Japanese yen continues to struggle, despite signals from Bank of Japan (BOJ) Governor Kazuo Ueda indicating openness to near-term interest rate hikes. The yen appreciated slightly by 0.2% to 155.78 in Asian trading but has weakened 0.45% for the week and 0.64% for the month.
Political developments have complicated the outlook for the yen. This week, the Japanese government nominated two academics perceived as strong supporters of ongoing economic stimulus to the BOJ’s board, which market participants interpreted as Prime Minister Sanae Takaichi signaling skepticism about higher interest rates. Charu Chanana, chief investment strategist at Saxo, remarked, “The political optics around appointments make markets question the pace and conviction of policy normalisation.”
Sterling and Euro Reflect Divergent Rate Expectations
The British pound remained steady at $1.3494 on Friday but faces a 1.4% decline for February, which would break its three-month winning streak. The pound’s weakness is attributed to the Bank of England’s dovish tilt, with market pricing indicating an 83% probability of a rate cut in March.
In contrast, the euro showed relatively muted movement, holding near $1.1808 and heading for a slight monthly loss of 0.35%.
U.S. Dollar Buoyed by Federal Reserve Signals and Supreme Court Ruling
The U.S. dollar gained 0.55% in February, supported by a slightly more hawkish Fed stance after some policymakers expressed openness to raising rates further if inflation remains high. Investors, however, still expect two rate cuts later in the year.
The U.S. Supreme Court’s recent decision to invalidate certain Trump-era tariffs has also bolstered the dollar by reinforcing institutional checks and balances on presidential authority. Gareth Berry, FX and rates strategist at Macquarie Group, said, “It suggests that the long-term prospects for the U.S. dollar might not be as grim as previously imagined.”
Summary:
- PBOC slows yuan appreciation by changing risk reserve rules, ending a 10-day yuan rally.
- Australian dollar jumps on expectations of Reserve Bank of Australia rate hikes.
- Yen struggles amid political appointments favoring stimulus over tighter monetary policy.
- Sterling weakens due to anticipated Bank of England rate cuts; euro remains stable.
- U.S. dollar rises on hawkish Federal Reserve signals and positive Supreme Court ruling.
As global central banks navigate varying economic conditions and geopolitical challenges, currency markets remain sensitive to interest rate outlooks and policy signals, setting the tone for financial market dynamics in the months ahead.
Reporting by Rae Wee; Editing by Edwina Gibbs and Kim Coghill
© 2026 Reuters. All rights reserved.