HONG KONG: China's yuan fell to its lowest level in nearly eight years and on Tuesday as the dollar climbed on expectations of higher interest rates under President-elect Donald Trump.
The yuan broke through 6.86 per dollar in morning trade, its weakest since December 2008 and taking its losses so far this year to more than 5 percent.
Traders say the People's Bank of China (PBOC) has been taking a hands off approach in the past few days, using the opportunity to release depreciation pressure on the yuan as the dollar rises.
But they do not think Beijing will allow the yuan to fall too sharply in the near-term and risk a political row before Trump is even sworn into office. On the campaign trail, Trump repeatedly accused China of devaluing the yuan to make its exports more competitive and threatened punitive tariffs on Chinese goods.
"We haven't seen central bank intervention for quite some time and that's also why the yuan fell so much recently and broke through key levels easily," said a trader at a big Chinese bank in Beijing.
The PBOC also did not try to press down dollar/yuan midpoint and let the market decide it, which showed it was still comfortable with market movements, the trader said.
The People's Bank of China set the midpoint rate at 6.8495 per dollar prior to the market open, weaker than the previous fix 6.8291.
In the spot market, the yuan opened at 6.8453 per dollar and was changing hands at 6.8596 at midday, 144 pips away from the previous late session close and 0.15 percent away from the midpoint.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.08, weaker than the previous day's 95.24.
The dollar index vaulted above its January peak to hit 100.22 on Monday, its highest level since early December last year. It is within reach of its December 2015 peak of 100.51, and a rise above that would take it to its highest level since 2003.
Though the yuan has held steady relative to CFETS and BIS baskets this year, it has depreciated the most in Asia against the dollar.
"In the longer term, we do not expect large yuan depreciation, especially considering bilateral trade concerns," analysts at China International Capital Corporation said in a report.
CICC still expects the yuan to ease to around 6.98 by the end of 2017.
In offshore markets, the yuan was trading 0.09 percent away from the onshore spot at 6.8657 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 7.044, 2.76 percent away from the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.
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