Yuan firms against dollar, but US inflation could renew downward pressure

SHANGHAI: China's yuan firmed slightly against the U.S dollar on Friday after a stronger fixing by the central bank, but analysts expected renewed pressure on the Chinese currency if data later shows US inflation rose further.

Investors are eyeing the release of the US core personal consumption expenditures index at 1230 GMT after the Federal Reserve indicated last week it may raise rates earlier than expected. The yuan opened at 6.4639 per dollar and was changing hands at 6.4642 at midday. The People's Bank of China (PBOC) set the midpoint rate at 6.4744 per dollar prior to market open, firmer than the previous fix of 6.4824.

PBOC has repeatedly warned against one-way bets of the yuan, which hit a three-year high against the greenback in late May.

"PBOC prefers to keep the trade-weighted RMB largely stable this year, while likely allowing USD/CNY to be a function of dollar moves amid dollar strengthening post June," HSBC said in a note on Friday.

The dollar index, which measures the value of the greenback against a basket of major currencies, has pulled back since it reached a two-month high on June 18 after the Fed signalled higher rates in 2023. It fell to 91.771 on Friday from the previous close of 91.847.

US President Joe Biden has accepted a $1.2 trillion bipartisan bill to boost infrastructure investment.

Investors had been looking to an infrastructure agreement to extend the recovery in the world's largest economy, but some economists worry that the massive fiscal stimulus could push inflation higher.

HSBC estimates that the US 10-year treasury yield , which has picked up gradually from a near four-month-low of 1.45% on June 18, will rise further and reach 1.8% by year-end.

Higher interest rates traditionally help support the dollar.

A trader at a Chinese bank expected the yuan to remain range-bound, as many overseas-listed companies rush to buy foreign currencies for dividend payment, but said Chinese companies were also keen to sell the dollar.