Chinese Yuan Outperforms Major Currencies amid Iran War, Petro-Yuan Gains Traction: UBS

The Chinese yuan outperformed most major global and Asian currencies since the outbreak of the Iran war, supported by stability-focused policies, according to a new report by UBS.

The report, titled “The Return of the Petro-Yuan,” highlights the currency’s resilience during a period of heightened geopolitical uncertainty, reinforcing its appeal within global investment portfolios.

According to the report, the yuan has declined by less than 1% against the U.S. dollar since the conflict began, significantly outperforming Group of Ten and Asian peer currencies, which have posted average losses of around 3%.

This performance is largely attributed to the policy approach of the People's Bank of China, which tends to stabilize the exchange rate during periods of volatility through tight daily management of the yuan-dollar fixing.

UBS noted a renewed market focus on the concept of the “petro-yuan,” as investors draw parallels between current geopolitical tensions and the aftermath of the October War 1973, which paved the way for the emergence of the petrodollar system.

The report suggests that ongoing tensions could accelerate the use of the yuan in settling oil trade, potentially enhancing its global standing at the expense of the U.S. dollar, particularly as some countries seek to diversify invoicing currencies.

UBS maintained a positive outlook on the Chinese currency, describing it as “attractive” within global currency strategies. It projects the yuan to reach 6.70 against the dollar by year-end.

The bank also recommended incorporating yuan-denominated assets into dollar-based portfolios to improve diversification and reduce reliance on the greenback in an increasingly risk-prone global environment.

The report emphasized that efforts to promote the petro-yuan are not new. Key milestones include the launch of yuan-denominated oil futures in Shanghai in 2018 and the introduction of China’s cross-border payment system in 2015 as an alternative to SWIFT.

Momentum behind yuan adoption accelerated following the fallout from the 2022 Russia-Ukraine war, particularly after Russian banks were cut off from global payment systems, prompting Moscow to shift toward the Chinese currency for energy trade settlements.

Despite growing momentum, UBS cautioned that widespread adoption of the petro-yuan still faces significant hurdles. These include limited currency convertibility, lower liquidity, and the relatively shallow depth of China’s financial markets compared to those of the United States.

The report added that current usage remains concentrated in sanctioned economies such as Russia and Iran, as well as select emerging markets like Brazil, while adoption among major oil exporters remains relatively limited.