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SHANGHAI: China’s yuan was largely steady against the U.S. dollar on Thursday, as the dollar slipped after comments from the U.S. Federal Reserve Chair reinforced market expectations for rate cuts.

The dollar index eased in overnight trade and hovered near a one-month low as traders zeroed in on the idea that U.S. interest rates were likely to fall this year even after some upside surprises on inflation.

U.S. Federal Reserve Chair Jerome Powell in his prepared remarks to the House panel said rate reductions will “likely be appropriate” later this year, “if the economy evolves broadly as expected” and once officials gain more confidence in inflation’s steady decline.

But pressure on the yuan remains as easing expectations drove yields on China’s long-dated bonds to record low levels.

As the Fed starts to kick off rate cuts, China will have more room for monetary easing, market participants said.

People’s Bank of China (PBOC) Governor Pan Gongsheng said in a press conference on Wednesday that there is room to further cut banks’ reserve requirements.

Yuan steady as central bank sets firmest fixing in a month

A property crisis, deepening deflation and mounting local government debt woes have increased the pressure on China’s policymakers to launch more stimulus.

China government bond yields fell across the curve, with the 10-year yield dropping to 2.255%, the lowest since April 2002.

“More easing put the yuan at risk of steady weakness, though likely to be contained given fixing stability and frequent reports across various news wires of state banks selling dollars,” analysts at Citi said.

Prior to the market’s opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1002 per U.S. dollar, firmest level in two months.

The spot yuan opened at 7.1950 per dollar and was changing hands at 7.1986 at midday, 15 pips weaker than the previous late session close.

The global dollar index fell to 103.331 from the previous close of 103.369.

The offshore yuan was trading 112 pips weaker than the onshore spot at 7.2098 per dollar.

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