On September 18th, offshore and onshore exchange rates continued their upward surge, breaking through the 6.70 mark in one fell swoop. The RMB has appreciated by 4% so far this year, and when calculated from the starting point of this appreciation cycle in April 2025 at 7.42, the total gain has now approached nearly 10%.

Notably, this sharp appreciation of the RMB coincides precisely with the Federal Reserve's decision to raise interest rates by 25 basis points for the first time in over three years. Following this rate hike, the US dollar has strengthened consecutively. On September 16th, the day before the hike, the US dollar index broke through the 100-point level, and the greenback has appreciated 2.07% so far this year. It is a relatively rare sight to see the US dollar and the RMB appreciating in tandem. In contrast, the US dollar index fell by nearly 10% over the course of last year.

Even more striking is the RMB's performance against the Euro. Since the start of this year, the RMB has appreciated 6.27% against the Euro, whereas in 2025, it had depreciated by 7.3% against the common currency. At one point, the RMB exchange rate against the Euro reached 8.4677, making it one of the more notable depreciations among major developed economy currencies that year. Therefore, the RMB's appreciation against major currencies has been comprehensive and broad-based.

Meanwhile, central banks of the three major economies are all raising interest rates simultaneously. The European Central Bank announced a 25 basis point rate hike on September 10th, its second increase in 2026, aimed at addressing the rebound in inflation triggered by geopolitical conflicts. This was followed by the Federal Reserve's announcement of a 25 basis point hike in the early hours of September 17th, raising the federal funds rate target range to 3.75% to 4%. Both the Fed Chair and the Bank of Japan Governor hinted at the possibility of continued rate increases in their post-meeting statements.

In his press conference following the rate-setting meeting, Chair Warsh repeatedly emphasized that inflation is the core reason behind this policy action. "The obvious fact is that inflation is too high and has been too high for too long," he stated. Regarding the yield on the 10-year US Treasury breaking above 5%, Warsh's explanation still centered on elevated inflation. First, he pointed to the strength of the US economy, noting that part of the rise in long-term yields in 2026 is due to increased economic strength. Second, he cited capital competition, specifically mentioning the surge in capital expenditure and the phenomenon of mega-corporations raising funds in the market. "Capital competition is real. I think this partly explains the increase in yields." Third, he mentioned geopolitical factors, stating that geopolitical hotspots around the world are pushing up long-term yields. The core of Warsh's message was to express his concerns about long-term inflation in the US and his determination to lower inflation levels. It is safe to say that this will not be a one-off rate hike by the Fed, and a series of further increases are expected to follow.

On September 18th, the Bank of Japan raised its interest rate to 1.25%, the highest level since 1995 and its sixth hike since exiting the negative interest rate policy in March 2024. Governor Kazuo Ueda stated at a press conference that with growing corporate willingness to raise wages and more proactive pricing behavior, medium- to long-term inflation expectations are rising, and there is an upside risk that Japan's potential inflation rate could exceed the 2% target. He emphasized that the central bank would continue to raise interest rates based on economic and price trends while maintaining price stability around 2% as a core policy objective. Ueda also noted that supported by robust AI demand, a recent recovery in crude oil prices, and the persistently weak yen, producer prices remain at high levels, providing support for sustained inflation. Analysts believe this further strengthens market expectations for additional rate hikes by the Bank of Japan.

The statements from these central bank governors clearly indicate that they will continue to raise rates in the future. This means the interest rate differential between China and the US will widen further, which is not good news for the RMB exchange rate. Due to the Fed's rate hike, the China-US interest rate spread has widened further, rising to 4.85% on September 10th, a record high since 2023, and briefly approaching the 5% mark during trading. China's 10-year government bond yield has remained stable around 1.68%-1.69%. The yield spread between China and US 10-year government bonds has inverted by approximately 317 to 330 basis points, reaching historically extreme levels. Clearly, such a large spread creates demand for capital to invest abroad, which is detrimental to the stability of domestic asset prices. Certain measures must be taken, and a thriving domestic demand is fundamental.

So what has caused the RMB to appreciate against other currencies this year? One significant factor is the trade surplus. Last year's surplus reached $1.19 trillion, and in the first eight months of 2026, China's US dollar-denominated trade surplus stood at $805.51 billion, continuing to expand. In any case, an excessively expanding trade surplus is not a good thing. Economic development and debt resolution should primarily rely on domestic demand. The current state of the Chinese economy is generally one where foreign trade is carrying the load alone, which is not conducive to the overall recovery of the economy. Efforts should be made from various aspects to guide domestic demand, especially the rise of household consumption and private investment. An appropriate appreciation of the exchange rate is actually conducive to the recovery of domestic demand.