China’s yuan has reached a new 14-month high against the dollar as of Monday, adding further complexity to an already challenging macroeconomic landscape for risk assets, including cryptocurrencies. The world’s three largest central banks— the Federal Reserve, the Bank of Japan, and China’s People’s Bank of China (PBOC)—are diverging in their monetary policies. The Fed recently implemented a hawkish rate cut, while the Bank of Japan is gearing up for a rate hike this week. Meanwhile, the PBOC is grappling with the implications of a stronger yuan amid a decelerating domestic economy. For the cryptocurrency market, which is influenced by global liquidity trends, these developments present significant challenges.
Yuan Strengthens Amid Dollar Weakness
The onshore yuan appreciated to 7.0498 per dollar at 08:30 am UTC, marking its most robust position since October 2024. The currency continued to gain value throughout the Asian trading session, rising from an initial value of 7.0508. This increase occurred in spite of the PBOC’s less-than-optimistic guidance, which set its daily reference rate at 7.0656—below market expectations—indicating an intention to moderate the yuan’s appreciation. Analysts mainly attribute the yuan’s strength to a general decline in the dollar’s value rather than internal economic factors. Additionally, seasonal demand at the end of the year has led Chinese exporters to convert more foreign exchange receipts for various financial obligations.
The yuan is anticipated to stabilize around the 7.05 level as the year concludes, although further appreciation may be limited, given the PBOC’s likely resistance to significant increases. Export activity remains crucial for driving economic growth in China.
Bank of Japan Rate Hike Heightens Uncertainty Amid US Fed’s Hawkish Stance
The yuan’s rise coincides with the upcoming monetary policy meeting of the Bank of Japan on December 18-19, where officials are reportedly finalizing a 25-basis-point increase, which would elevate the policy rate to 0.75%. This potential rate hike has rekindled worries about the unwinding of the yen carry trade, which previously led to a sharp global market sell-off in early August, causing Bitcoin to plummet by over 15% in one day as leveraged positions were liquidated. Market participants will be keenly observing comments from BOJ Governor Kazuo Ueda after the meeting, as a dovish outlook on future rate increases could help mitigate any adverse market reactions.
Last week, the Federal Reserve made its third consecutive rate cut, lowering the federal funds rate to a range of 3.50%-3.75%. However, this decision carried a hawkish tone, with the dot plot indicating only one additional cut anticipated in 2026. Fed Chair Jerome Powell attributed inflation concerns to tariffs, and three committee members expressed dissent—marking the highest level of disagreement since September 2019.
Impact of Diverging Central Bank Policies on the Crypto Market
The varying policies among central banks create a mixed outlook for cryptocurrency markets. A weaker dollar generally benefits Bitcoin and other digital currencies as they are viewed as alternative stores of value. However, the potential liquidity reduction resulting from the unwinding of yen carry trades could counteract these gains. Recent data on exchange-traded fund (ETF) flows indicates limited buying interest. On December 12, spot Bitcoin ETFs experienced net inflows of only $49 million, with BlackRock’s IBIT accounting for nearly all of it at $51 million. The other 11 ETFs either saw no flows or experienced minor outflows.
This is a stark decline from the peak daily inflows exceeding $500 million observed in November, raising concerns about whether institutional demand can sufficiently support the market if macroeconomic-driven selling intensifies. With the BOJ’s decision approaching mid-week and liquidity conditions tightening as the year wraps up, cryptocurrency traders should prepare for increased volatility in the upcoming trading sessions.
