SHANGHAI: China's yuan rose to its strongest level against the US dollar in two weeks on Thursday after a widely anticipated U.S Federal Reserve interest rate hike prompted dollar weakness, but corporate clients snapping up the greenback limited its gains.
The Fed raised interest rates by a quarter of a percentage point, to a range of 1.25 percent to 1.50 percent. Its forecast of three additional rate increases in 2018 and 2019 was unchanged from its projections in September.
The People's Bank of China (PBOC) nudged money market interest rates up just hours after the Fed's decision. The PBOC's move surprised economists, but at just five basis points the increases are seen as small, and more symbolic than substantive.
Prior to market opening on Thursday, the PBOC set its official yuan midpoint at 6.6033 per dollar, its highest level in more than two weeks. The midpoint rate was 218 pips or 0.33 percent stronger than the previous fixing of 6.6251 per dollar on Wednesday.
It was also the biggest one-day strengthening of the official midpoint in percentage terms since Nov. 23.
In the spot market, the onshore yuan opened at 6.6060 per dollar and rose to a high of 6.6040 per dollar at one point in morning trade, its strongest level since Nov. 30.
At midday, the spot yuan was changing hands at 6.6090 per dollar, 105 pips stronger than the previous late session close, but only 0.09 percent away from the midpoint.
Traders said the yuan gained support from the dollar's losses, as the outcome of the Fed policy meeting had been widely expected, and the market had already priced in a December increase.
A trader at a Chinese bank said the weaker dollar offered corporate clients chances to shore up their positions in the greenback to meet their mid-month financing needs.
Ming Ming, an analyst at CITIC Securities, said in a note that the central bank's move to increase market rates following the Fed decision was meant as a warning to overseas investors to not "maliciously short the yuan."
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.2, weaker than the previous day's 95.42.
The global dollar index fell to 93.373 from the previous close of 93.429.
The offshore yuan was trading 0.02 percent firmer than the onshore spot at 6.6080 per dollar.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.763, 2.36 percent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.