HONG KONG: The yuan drifted lower on Tuesday, lingering near a 16-month low against the US dollar, even after the central bank set firmer-than-expected guidance as the greenback pulled back.
By 0325 GMT, the yuan was 0.03% lower at 7.3291 to the dollar, after closing at the lowest level since September 2023 on Monday.
The currency has weakened 0.4% against the dollar so far in 2025 after declining for three years in a row, weighted down by falling Chinese government bond yields, rising concerns over global trade tensions before US President-elect Donald Trump’s return to office on Jan. 20 and a bullish dollar momentum.
China’s yuan falls to 16-month low despite firmer fix, state media messages
Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1879 per dollar, 1,115 pips firmer than a Reuters’ estimate.
The central bank has been keeping the daily yuan official guidance firmer than market projections, suggesting it is reluctant to see a sharp drop despite the dollar’s strength. Based on Tuesday’s official guidance, the yuan is allowed to drop as far as 7.3317.
“We believe the PBOC is becoming more determined to prevent RMB from a sharp depreciation” to foster a ‘powerful currency’ and stabilize property and stock markets, analysts at Nomura said in a note.
The central bank may have shifted to a more discretionary approach in determining the timing of reserve requirement ratio (RRR) cuts and rate cuts, they added.
The US dollar hovered near a one-week low versus major peers as traders considered whether Trump’s tariffs would be less aggressive than promised.
On Monday, the greenback slid against the likes of the euro and sterling following a report in the Washington Post that Trump’s aides were exploring plans that would apply tariffs only on sectors seen as critical to US national or economic security.
However, the US currency made up some of the ground after Trump denied the report.
The recent pullback in the dollar will alleviate the near-term pressure on USD/CNY, which suggests that the PBOC will likely maintain the daily onshore fix rate under 7.20 in coming days, Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said in a note.
In another sign of tight liquidity offshore, Hong Kong’s overnight offshore yuan HIBOR rose to 8.10273%, the highest level since June 2021.
The offshore yuan traded at 7.344 yuan per dollar, up about 0.04% in Asian trade. Chinese government 10-year bond yields fell 0.2 basis points to 1.61%.
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