Lower Yuan = More Yuan-based Transactions
A lower Yuan may make it a less attractive place to park reserves. The Yuan, currently however, is not a reserve currency but an increasingly transactional one. A lower Yuan means Chinese goods will become cheaper and trading partners should see an increase in trade with China, meaning the Yuan will be used more with countries that already trade with China in Yuan and countries that don’t may be encouraged to do so as their trade with China increases. Thus, demand for the Yuan as a transactional currency will increase and demand for the dollar decrease.
The greater demand for a currency as a transactional vehicle, the greater the need to hold that currency as a reserve asset.
What are the Fed’s Options?