SHANGHAI: China’s yuan bounced off a 2007 trough against a broadly weaker dollar on Friday, but it slipped to a 19-month low against currencies of its major trading partners, as a trade row between the world’s two largest economies showed few signs of abating.
Selling resumed in financial markets after US President Donald Trump’s temporary pause on tariffs for many countries sparked a brief rally a day earlier.
Trump’s 90-day respite, despite his insistence for days that his policies would never change, didn’t include China. Instead, he ratcheted up duties on Chinese imports to an effective 145% rate.
The trade war comes at a challenging time for China as policymakers have struggled to revitalise economic growth after the COVID-19 slump, weighed down by a protracted property market downturn and deflationary forces.
However, the People’s Bank of China will not allow sharp yuan declines and has instructed major state-owned lenders to reduce dollar purchases, people with knowledge of the matter told Reuters.
A weaker yuan would make Chinese exports cheaper and alleviate tariff impact on the economy. However, a sharp decline could also increase unwanted capital outflows and risk financial stability, analysts and economists said.
To reflect the broad dollar weakness in global markets, the PBOC lifted its official yuan midpoint guidance fix for the first time in seven days on Friday.
Prior to the market open, the PBOC set the rate , around which the yuan is allowed to trade in a 2% band, at 7.2087 per dollar.
That was 5 pips firmer than the previous fix and 1,017 pips firmer than a Reuters’ estimate of 7.3104.
The PBOC has slightly loosened its grip on the currency this week by allowing official guidance to weaken past the key threshold of 7.2 to the dollar, although it came in much stronger than market projections, in what traders and analysts interpreted as an official attempt to keep the yuan steady.
The onshore yuan rebounded from a trough of 7.3518 per dollar hit a day earlier, the level that was last seen during global financial crisis, to 7.3160 around 0212 GMT. But it remained down 0.8% this month.
Its offshore counterpart was at 7.3224 as of 0212 GMT, down 0.12% in Asian trade. It hit an all-time low of 7.4288 on Tuesday.
The CFETS yuan basket index, a gauge that measures the yuan against a basket of currencies, fell to 97.35 on Friday, the lowest since September 2023, according to Reuters calculations based on official data.
“The current US tariff on China has reached 145%, and the impact of weakening the yuan against the dollar to support exports is only a drop in the bucket,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.
“On the contrary, weakening the yuan against the basket could enhance the competitiveness of China’s exports to non-US countries.”
Xing Zhaopeng, senior China strategist at ANZ, concurred, saying the yuan’s value against the basket “needed to depreciate accordingly to reflect the changes” from higher US tariffs on Chinese goods in order to make them competitive versus other countries.
Separately, the Hong Kong dollar hovered near a four-year high against the greenback on persistent inflows through the southbound leg of the stock trading link.
It last traded at 7.7578 to the US dollar around 0212 GMT, closer to the strong side of its trading band of 7.75.
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