SHANGHAI: China’s yuan held steady on Wednesday with the dollar retreating from one-year highs as traders tried to come to grips with the sharp escalation in the Russia-Ukraine conflict.
The dollar index was wobbly after losing ground for two straight sessions, taking a breather after earlier getting a safe-haven driven lift as US ATACMS missiles struck Russian territory for the first time on Tuesday.
Market nerves were calmed after Russia’s foreign minister said the country will “do everything possible” to avoid the onset of nuclear war, hours after Moscow announced it would lower its threshold for a nuclear strike.
The yuan has been put to the sword recently by Donald Trump’s return to the White House, trading near a 3-1/2-month low as investors worried about higher tariffs on Chinese goods and hostile trade relations between the two economic giants in the next four years.
However, the “Trump Trade” that boosted the dollar is facing challenges from the President-elect’s controversial cabinet nominations and the escalation in the Russian-Ukraine war, said Philip Wee, senior FX strategist at DBS.
During Trump’s first presidency, the yuan weakened about 5% against the dollar in the initial round of US tariffs on Chinese goods in 2018, and fell another 1.5% a year later when trade tensions escalated.
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1935 per dollar, 451 pips firmer than a Reuters’ estimate.
Yuan steadies at 3-1/2-month low
The PBOC has been fixing the midpoint stronger than broad market expectations since last week to prevent a sharp depreciation of the currency.
The spot yuan opened at 7.2366 per dollar and was last trading 14 pips lower than the previous close at 7.2409 as of 0258 GMT and 0.66% weaker than the midpoint.
On the policy front, China left benchmark lending rates unchanged at the monthly fixing on Wednesday, in line with market expectations, after lenders slashed the rates by bigger-than-expected margins last month to revive economic activity.
In a client note, UBS analysts said that US tariffs shock could trigger intensifying policy support in 2025-2026, as China tries to boost domestic demand and offset the negative impact.
“The market will likely remain focused on implementation of property support measures and fiscal expansion, as opposed to further interest rate cuts.”
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