The Chinese yuan, one of five currencies included in the special drawings rights basket maintained by the International Monetary Fund, has declined 2.7% this month against the U.S. Dollar (USD), its worst performance since September.

Goldman Sachs , a giant investment bank, suggests that the dollar could fall further.

The devaluation of the yuan has historically been viewed as a bullish event for alternative fiat currencies like gold and bitcoin, but on the flip side, a strong dollar is also a factor. Some observers believe that the U.S. dollar is on a rise and any further strength could lead to a continued tightening of monetary policy worldwide, and be a negative for risk assets like cryptocurrencies.

Through a managed-floating system, the People’s Bank of China’s (PBOC), China’s central banking institution, pegs CNY’s currency value to a Basket of 24 different currencies. Every trading day, the daily fix or midpoint provides direction to market. Currency basket is a reflection of China’s trading partners. The dollar, which is the largest currency, has the highest weighting, at 19.83%. Other currencies in the basket include the euro, British pound (pound sterling), Australian dollar and Mexican Peso.

The PBOC manages the yuan’s float by actively buying and selling yuan. The PBOC will buy yuan and sell dollars if USD/CNY is about to rise beyond the 2% limit. The bank also buys dollars against other currencies in order to maintain the percentage of greenbacks in reserve. This ensures that the intervention is recycled into other foreign units.

This process, which is largely composed of the Euro and Japanese Yen, inadvertently increases the dollar index. It causes financial tightening around the world and leads to aversion to risk.

“USD/CNY rallies mean PBOC has to sell the pair in order to maintain the 2% band, and buy the dollar to maintain a constant proportion of USD reserves. This causes the dollar index to rise, causing financial tightening, and aversion to risk, according David Brickell of Paradigm’s institutional sales director.

When the dollar rises, those with debts denominated in dollars and receipts made in other currencies find it difficult to service the debt. Brickell estimates that more than 17 trillion dollars of USD debt have been issued outside the U.S. Dollar strength is a factor that tends to cause risk aversion around the world.

This month, the dollar index rose 2.7%. Bitcoin has fallen by 7.3% this month, the most significant monthly drop since December.

Noelle Acheson said that while the PBOC may have a dollar-bullish intervention, it is not guaranteed.

In her newsletter, she said that the PBOC had hinted at greater flexibility in its CNY target band. It is not a certainty that the PBOC will intervene if a weaker yuan benefits exports. “Now China has different priorities – PBOC is diversifying its reserves and buying gold instead of USD.”

PBOC Governor Yi Gang stated last month that the central banks can reduce regular interventions and give the market more freedom to determine the yuan exchange rate. Yi did, however, stress that the central bank has the right to intervene during times of market turmoil.

Stephen Alpher edited the book.