SHANGHAI: China's yuan firmed against the dollar on Wednesday as a rally in the greenback paused and as Beijing reiterated it will not use its currency as a tool in the trade dispute with Washington.
All the same, analysts expect the yuan to trend lower over the longer run on economic slowdown fears, with current and former central bank officials downplaying the significance of the currency breaking through the psychologically key 7 level.
Before markets opened, the People's Bank of China (PBOC) set the midpoint rate at 6.9072 per dollar, the lowest level since March 15, 2017.
Although some took the fixing as signal the authorities are relaxed about further falls in the yuan, sentiment was calm in the spot market, where it opened at 6.9220 per dollar and was changing hands at 6.9209 at midday, 51 pips stronger than the previous late session close.
Ken Cheung, senior Asian FX strategist at Mizuho Bank, attributed the yuan's uptick to a pullback in both the dollar index and US bond yields.
The global dollar index fell to 95.586 from the previous close of 95.668.
The yuan has lost over 5 percent of its value this year, and was under heavy selling pressure earlier in the year before authorities stepped up efforts to flush out bearish bets.
The Chinese government also appeared to reject the notion that Beijing would use devaluation as a tool in trade disputes. US President Donald Trump has frequently accused China of manipulating its currency for a trade advantage.
China's Foreign Ministry on Tuesday said remarks by a US Treasury official about the yuan's depreciation were groundless and irresponsible.
"You have the currency report [from the US Treasury] next week. If the yuan weakens too quickly, that may trigger Trump to name China as a currency manipulator," said a Hong Kong-based economist who declined to be identified.
"China has learnt the lesson of 2016," he said, referring to the shock yuan devaluation in late 2015 that sparked an outflow of capital and spread turmoil in global markets.
For now, though, Mizuho's Ken Cheung believes that China could be testing the waters of the yuan breaking the key 7 level, citing comments by current and former central bankers.
On Tuesday, Liu Shijin, monetary policy committee member of the PBOC said in a commentary in state-run media that the yuan equilibrium is a dynamic level and the discussion of the currency breaking or holding the 7 level misses the point.
A day later, former central bank advisor Yu Yongding wrote in a commentary that Chinese authorities should refrain from direct intervention even if the yuan falls below that point.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 92.91, weaker than the previous day's 93.07.
The offshore yuan was trading 0.08 percent away from the onshore spot at 6.9263 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 7.0315, 1.77 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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