SHANGHAI: China’s yuan jumped to a more than two-week high against a falling dollar on Thursday, as the Federal Reserve said it had turned a corner in the fight against inflation, with investors expecting the US tightening cycle may end soon.
The greenback tumbled in global markets after the US central bank delivered a small rate rise as expected, while investors took a dovish cue from Fed Chair Jerome Powell’s remarks that “the disinflationary process has started” in the world’s largest economy.
The Chinese currency benefited from the dollar weakness. Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.7130 per dollar, 362 pips or 0.54% firmer than the previous fix of 6.7492, the strongest since July 11.
In the spot market, the onshore yuan opened at 6.7060 per dollar and strengthened as far as 6.7007 at one point, its strongest level since Jan. 16. By midday, it was changing hands at 6.7148, 287 pips firmer than the previous late session close.
Currency traders said the yuan’s sharp rise in early deals on Thursday prompted some market participants to take profit on their long yuan positions.
“Sharp gains in the yuan may come to an end, and future movements will be dependent on the pace of domestic economic recovery,” said a trader at a Chinese bank.
A second trader at a foreign bank said the yuan strength may be capped soon as their corporate clients, especially Chinese importers, would start to stock up on dollars.
China’s yuan steadies ahead of Fed decision
Still, the Fed’s dovish tilt, along with Beijing’s exit from its stringent zero-COVID strategy and conversion to pro-growth policies, has helped restore market sentiment.
The Chinese yuan has strengthened about 9% to the dollar since the trough it hit in November and is up about 2.8% so far this year, reversing much of the losses suffered in 2022, when the yuan booked its worst annual performance in 28 years.
“China’s current account surplus should drop back to pre-COVID levels,” Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs said in a note.
“This should limit further appreciation in the yuan’s trade weighted index, although we expect the CNY to appreciate further against the USD on both China growth acceleration and a weaker dollar.”
Goldman Sachs and other global investment banks have raised their forecasts for the Chinese yuan this year on expectations that the country’s economic reopening and Beijing’s decision to relax property sector curbs will trigger strong capital inflows.
By midday, the global dollar index fell to 100.918 from the previous close of 101.217, while the offshore yuan was trading at 6.7188 per dollar.
The one-year forward value for the offshore yuan traded at 6.5811 per dollar, indicating a roughly 2.09% appreciation within 12 months.
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