China's yuan rebounded against the dollar on Wednesday in response to the weakness of the US currency in overseas markets, where the dollar hit a fresh all-time low against the euro. Reflecting the dollar's tumble overnight, after comments by Fed vice chairman Donald Kohn suggested more US rate cuts were likely.
The Chinese central bank set Wednesday's daily mid-point for the yuan at 7.1455, up from Tuesday's 7.1505. That helped spot yuan rebound to finish at 7.1420, up from Tuesday's close of 7.1580. A surge in the last half-hour of trade took it to a record post-revaluation high of 7.1410, marginally above its previous peak of 7.1413, which was reached last week. "The yuan is rebounding mainly because of expectations that the Fed will soon cut US interest rates further," noted a dealer at an Asian bank in Shanghai.
The yuan fell on Monday and Tuesday because the market believed the Chinese central bank wanted a temporary pause in its appreciation. So it may not continue rising strongly above 7.14 in the near term, some traders said.
The central bank set the yuan's mid-point against the euro at a five-week low of 10.7115 on Wednesday, down sharply from Tuesday's 10.6017, suggesting it may want the yuan to lag other currencies against the dollar for a while. But expectations for long-term yuan appreciation remained firm. One-year offshore dollar/yuan non-deliverable forwards fell to 6.4770/4820, from 6.4910/60 late on Tuesday.
Their latest levels implied yuan appreciation of between 10.24 and 10.32 percent in 12 months from Wednesday's mid-point, up from 10.08-10.16 percent implied on Tuesday. The post-revaluation record for implied appreciation is 10.48 percent, recorded in early December after the central bank first signalled it would use yuan appreciation to fight rising inflation.