China's yuan reaches two-week high, tracking dollar weakness

China's yuan rose to its highest in nearly two weeks on Tuesday, underpinned by broad dollar weakness, as Washington struggled with a partial government shutdown and open confrontation between the White House and the US Federal Reserve. US President Donald Trump's budget director and chief of staff said the partial US government shutdown could continue into January.
Financial markets were also rattled after President Donald Trump criticised the Fed, describing it as the "only problem" for the US economy. Yuan traders said the strength in the yuan was largely a reaction to the easing dollar in overseas markets, while some corporate clients were also liquidating dollar positions to prevent further losses.
Prior to the market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 6.8919 per dollar, 87 pips or 0.13 percent firmer than the previous fix at 6.9006. In the spot market, the onshore yuan rate opened at 6.8968 per dollar and rose as high as 6.8755, its strongest since December 13.
As of midday, onshore spot yuan was changing hands at 6.8770, firming by 214 pips from the previous late session close and 0.22 percent against the midpoint.
Traders said fluctuations in the yuan rate were amplified on Tuesday morning by low market liquidity, with most global markets shut for Christmas and many investors already gone for year-end holidays.
Market watchers expect developments in China-US trade negotiations to resume influencing yuan movements in the new year.
"In the year of 2019, the yuan exchange rate will remain politically sensitive between the US and China, which will prevent the yuan from tumbling unless the US and China fail to agree to a trade deal by 1 March," Gao Qi, FX strategist at Scotiabank in Singapore, said in a note.
"A sharp depreciation is not in Chinese authorities' interest either next year that is the 70th anniversary of the founding of the People's Republic of China," he added.
Sheng Songcheng, a PBOC adviser, told state media that China should defend the yuan at the key seven-per-dollar level.
"The key threshold of seven per dollar is very important. If the yuan weakens past that crucial point, the cost of stabilising the exchange rate will be greater," Sheng was quoted as saying. The global dollar index fell to 96.5 at midday from the previous close of 96.553. Offshore yuan was trading at 6.8925 per dollar as of midday.