Yuan rises to new 6-1/2-mth high as Fed takes dovish turn

SHANGHAI: China's yuan rose for a seventh straight session on Thursday, breaching a key threshold to a fresh 6-1/2-month high on the dollar, after the U.S. Federal

Reserve signalled a pause in its tightening cycle. The Fed said it would be "patient" before making any further

moves, signalling its three-year-drive to tighten monetary policy may be at an end amid heightened concerns about U.S. economic growth from impasses over trade and government budget negotiations.

The stance dragged the dollar lower, with the dollar index falling to 95.264 at midday, after dropping more than 0.4 percent overnight.

Prior to market opening on Thursday, the People's Bank of China (PBOC) lifted its official yuan midpoint to the strongest level to 6.7025 per dollar, 318 pips, or 0.47 percent, firmer than the previous fix of 6.7343 and was the firmest since July 18, 2018.

But the official guidance rate came in weaker than a Reuters estimate of 6.6984. Several yuan traders also said their models suggested the fixing should have been set firmer than the key 6.7 per dollar levels.

"There was a deviation between our model and the official fixing," said a trader at a Chinese bank, adding that the authorities might not be willing to see a sharp rise beyond 6.7 yuan per dollar for now.

The United States and China opened a pivotal round of high-level talks on Wednesday aimed at bridging deep differences over China's intellectual property and technology transfer practices and easing a months-long tariff war.

The currency issue was on the agenda, according to U.S.

Treasury Secretary Steve Mnuchin. And some yuan traders believe a stronger yuan would at least create a better atmosphere for the trade talks.

"While a more dovish Fed has kept the USD in check, the market's expectations of some fragile deal from the ongoing U.S.-China trade talks helped drive a surge in regional currencies," Eugenia Victorino, head of Asia strategy at SEB Markets, said in a note.

"As such, the risk premium attached to the trade war has mostly been unwound. If the trade negotiations come up with a deal, the market reaction will likely be limited since it has already been priced in."

Victorino expects the yuan to trade around 6.75 per dollar at the end of the year.

In the spot market, the onshore yuan opened at 6.6900 per dollar and was changing hands at 6.7028 at midday, 128 pips firmer than the previous late session close. The offshore yuan was trading at 6.7131 per dollar as of midday.