USD/CNY trend reversal holds despite renewed geopolitical tensions

The trend reversal that’s helped to snap the greenback out of an 18-month slide against the yuan has shown little sign of slowing down despite the breakdown in the ceasefire between the United States and Iran. 

Since hitting a four-year low of 6.7655, USD/CNY has gained 0.68% as the dollar continues to strengthen against the yuan. 

The dollar had been on a steady decline against a range of international peers since the arrival of President Donald Trump’s second term in the White House, with the administration repeatedly expressing a willingness to see a weaker greenback for trade advantages. 

However, new factors have entered the fray and appear to be creating new tailwinds for the greenback. 

The breakdown in the peace agreement between the United States and Iran in recent days has also introduced new pressures for both USD and CNY. So what’s next for the pair at a time when the geopolitical outlook is becoming increasingly uncertain? And what direction will USD/CNY take now that tensions in the Middle East are once again escalating? 

Uncertain Impact of the Iran War

One of the biggest headwinds for the dollar, as President Trump announced the end of the ceasefire with Iran, revolves around the United States’ transition from soft to hard power and its impact on dedollarization. 

JPMorgan analysts suggest that some of the pressure that the dollar will face will stem from new approaches to global savings. 

Because the US runs twin deficits, a fiscal deficit and a current account deficit, it’s the dollar’s status as the world’s reserve currency that maintains huge capital inflows into the United States, in which around $100 billion each month is required to offset the current account deficit to prevent a weakening effect. 

But escalations in the Middle East could see more trade flows slow as nations instead look to increase their defense spending. 

This and an increasingly fraught relationship between the US and allies that hold US dollar assets could also lead to the US seeing a smaller volume of global savings come its way. 

Interest rate challenges

The Strait of Hormuz has been a key confounding factor in the war in Iran, and the collapse of the ceasefire in recent days saw the price of oil settle 5.4% higher at $78.55 per barrel as the likelihood of further disruption throughout the busy shipping lane increased. 

Rising energy costs linked to higher oil prices can have a significant impact on inflation, which can have major implications for USD strength. 

“Central banks stayed cautious,” noted a Wealthify review of the state of the war back in May. “In the US, the Federal Reserve signalled rates may stay higher for longer unless inflation eases, with investors watching June for the first decision under the new Chair of the Federal Reserve, Kevin Warsh.”

“A mid-month wobble linked to the US-Iran conflict ultimately faded after a 60‑day extension to the ceasefire and moves to reopen the Strait of Hormuz (though tensions remain, as ever, fragile).”

The Federal Reserve opted to hold interest rates last month between 3.5% and 3.75%, but with US PCE inflation rising to a three-year high of 3.8% as tensions boiled over in April, we may see hikes take place before the end of 2026. 

Should a protracted conflict in the Middle East lead to Fed interventions, we could see momentum drive USD/CNY towards a retest of resistance at 6.9555. 

China’s plans for CNY

Because the People’s Bank of China (PBOC) sets the USD/CNY central rate, it has a major say in the direction of the pair. 

It’s also important to note that much of the trend reversal between the currencies has been driven by a conscious change of approach from the PBOC, which has pivoted to avoid the yuan appreciating further against its peers. 

China’s state commercial banks added $47 billion to their net foreign asset position in June, bringing their Q2 2026 totals up to $70 billion and amounting to $165 billion for the calendar year. 

This points to a widespread effort to counterbalance the rate of the yuan’s growth against the dollar, which had rallied more than 7.5% at its peak during Trump’s second term. 

What’s next for USD/CNY? 

There are plenty of pushing and pulling effects at play, but the return of the conflict in Iran will have a decisive impact on the direction that USD/CNY will take. 

Given that the available evidence suggests that the war isn’t going to find a conclusion any time soon, the prospect of interest rate hikes seems more likely, which would contribute to a return to 7.000 for the greenback against the yuan by the end of the year. 

But traders should also keep emerging headwinds in mind. Protracted conflicts may lead to new challenges to the dollar’s status as the world’s reserve currency. Although China appears content with addressing the appreciation of the yuan, the return to hard power in the US could deliver a new phase of volatility for USD that may suit reactive traders better than long-term speculators.