The offshore yuan surged past 7.2 against the US dollar for the first time since November, driven by renewed optimism that Washington and Beijing may soon resume trade talks. The currency's rally reflects shifting investor sentiment as Chinese assets regain some appeal amid signs of diplomatic engagement.

Speaking to the South China Morning Post, Xu Tianchen, senior China economist at the Economist Intelligence Unit, said the yuan's strength stems from "expectations that the US and China will soon begin negotiating," noting that "a working-level engagement may have already started, or was about to start." He added, "We can reasonably expect the two countries to dial down some of their tariffs against each other, as they are egregious and unsustainable," but warned that "any negotiations will be quite lengthy and full of uncertainties, bringing volatility to the exchange rate in the process."

Despite this rebound, Xu noted that global investors are not yet convinced. "They need to see tangible signs that China is capable of comfortably fending off Washington's challenges before they increase their bets," he said.

US President Donald Trump added fuel to the optimism during a Sunday interview on NBC's Meet the Press, stating, "I'm going to lower [the tariffs against China] at some point, because otherwise, you could never do business with them," and "they want to do business very much."

Yuan Push

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The yuan had faced depreciation pressure in early April, with the onshore rate sliding to a 17-year low and the offshore rate hitting a record 7.4290. This followed Trump's tariff escalation, which rattled markets. Although the yuan dropped sharply during the first trade war under Trump, from 6.27 in April 2018 to 7.18 by late 2019, analysts believe a repeat is unlikely due to China's enhanced focus on currency stability and the yuan's growing international role.

Beijing is accelerating efforts to internationalize its currency. A new action plan aims to expand the yuan's use in global trade, backed by Shanghai's financial infrastructure and targeting stronger ties with countries in the Global South.

Skepticism over the stability of US assets, driven by America's increasingly aggressive use of tariffs, has prompted investors to seek alternatives. Yuan-denominated assets are regaining appeal in that context.

Read more: Russia overcomes US pressure, returns to yuan surplus: Report

In a parallel development, the Hong Kong Monetary Authority intervened in the currency market for the first time since 2020, purchasing US$6 billion to uphold the Hong Kong dollar's peg. The action was triggered when the exchange rate hit the 7.75 ceiling of the Linked Exchange Rate System.

Meanwhile, China's ambassador to the US, Xie Feng, pushed back against Washington's trade tactics, stating, "We don't want a tariff war, but we're not afraid of one either." He described tariffs as "drawing a knife to cut water," calling them "ineffective and ultimately self-defeating." He urged that talks, if they happen, be conducted "with equality, respect and reciprocity."

Other Asian currencies also gained ground, with Taiwan's dollar posting its largest single-day rise in over 30 years. Taiwan's financial regulator reportedly met with top insurers to assess how the rally affects their US debt holdings.