Indonesia's central bank has swiftly responded to the external shocks by implementing a series of robust measures aimed at stabilizing the foreign exchange market, which they regard as critical to national economic health. Similarly, India has faced immense pressure to protect the rupee from further erosion and has resorted to massive dollar sales to curb its decline. These actions underscore the profound interconnectedness of global economies and the precarious nature of current currency dynamics.

As for the Chinese yuan, it too finds itself under significant strain. On December 3, the offshore yuan exchange rate fell below 7.3, marking a new low unseen in thirteen months. Investors hold their breath as they ponder the roots of this decline—many would point their fingers at the United States. Following Trump's election victory, market sentiments shifted, leaving analysts predicting inflation spikes and a gradual slowdown in the Federal Reserve's interest rate cuts, leading to the dollar's resurgence. The dollar index shot up by more than 2.7%, showing a classic case of a stronger dollar pushing down non-dollar currencies.

However, the pressures on the yuan are not solely a byproduct of dollar strength; rather, it has encountered a slew of unpredictable 'black swan' events. For instance, significant comments from U.S. government officials declaring intentions to impose tariffs on Chinese goods threaten to dampen China's trade prospects massively. Warning bells regarding the BRICS nations potentially replacing the dollar with a new currency only amplified fears about escalating tensions in the global economic landscape. If we factor in ongoing sanctions and trade wars including targeted actions against China's semiconductor industry, it becomes clear why the yuan is under constant duress, dropping to around 7.29.

These currency fluctuations ripple through bond markets as well. On December 2, influenced by the devaluation of the yuan, yields on ten-year government bonds fell below 2%, striking a historic low. An expanding interest rate margin between the U.S. and China has incentivized foreign investors to shift from yuan-denominated assets to dollar holdings, exacerbating the pressure on the yuan. Will this trend lead to a continuous slump, possibly breaching the watershed mark of 7.5 next year?

The People's Bank of China (PBOC) has made it clear in their monetary policy reports that a vigilant stance to avoid extreme fluctuations in the exchange rate is paramount. Experts predict that the yuan could encounter serious risks if it falls below 7.5. Should the value approach this critical threshold, one can expect the central bank to deploy various policy tools to stabilize it. Historical trends suggest that while the yuan faced considerable devaluation pressure in recent years, the PBOC has consistently defended the 7.3 threshold, successfully preventing it from breaching 7.4.

On another note, the devaluation of the yuan can serve a strategic purpose in countering U.S. tariffs, as a lower yuan equates to cheaper Chinese goods on the international market, thereby boosting export competitiveness. Despite its depreciation against the dollar, the yuan has appreciated by 1.97% against a basket of currencies, revealing a resilient economic undercurrent. Insights from financial giants like Goldman Sachs indicate that China's economic potential is well beyond expectations, with a transition towards a tech-driven growth model and favorable monetary policies poised to bolster the yuan's strength. Therefore, as long as the fundamental economic outlook remains stable, pessimism towards the yuan exchange rate might be unwarranted. Observers will be keenly watching how China maneuvers through the complexities of this currency war and whether it can emerge unscathed.