China's contribution to the US dollar's demise: what's happening?

China's Defensive Strategy Against the US Dollar

In their ongoing economic competition, China has launched a new front that is aimed at the US dollar. It has been alleged that Chinese institutions have made large wagers against the US dollar with the intention of depreciating it. Based on approximations, these financial firms have invested almost $100 billion in short positions on the dollar, hoping for a drop that would yield significant gains.

China's currency policy, especially with regard to its use of foreign exchange swaps, is based on a type of financial "shorting" of the US dollar. Chinese banks have benefited from changes in the value of the dollar thanks to this strategy. This is how it operates:

Through these swaps, Chinese banks effectively lock in an exchange rate by exchanging yuan for US dollars. If The Chinese bank gains if the dollar weakens by the time the agreement is signed and the American counterpart owes more yuan. Chinese state-run banks are thought to have amassed more than $100 billion in short positions against the dollar as a result of this approach, which has generated a great deal of activity in the foreign exchange market. As banks carried out these exchanges to support the yuan without depleting China's foreign reserves, this trend grew stronger in 2023 and 2024.

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