SHANGHAI: China's yuan firmed to a more than three-week high on Thursday after the central bank set a stronger daily fixing, as easing expectations of aggressive rate hikes by the Federal Reserve caused a pull back in the dollar.
Traders said a recovery in risk sentiment and a possibly less-hawkish approach by the Fed meant the yuan could once again test its January highs against the greenback, supported by corporate demand.
"USDCNY looks like it's going to grind lower for a while. Market expectations are fairly consistent and in this kind of situation it's not likely to change course," said a trader at a foreign bank.
The People's Bank of China set the yuan's daily midpoint at 6.3321 per dollar, its firmest since Jan. 26, after the currency marked the same milestone at the end of its onshore trading session on Wednesday.
Yuan slips as divergent China-US monetary policy exerts downward pressure
That pushed spot yuan, which opened at 6.3320 per dollar, to 6.3289 in morning trade, also the highest since Jan. 26. By midday it had reversed most gains to trade hands at 6.3365 per dollar, just 1 pip stronger than Wednesday's late session close.
The offshore yuan was slightly weaker, trading at 6.3371 per dollar form Wednesday's close of 6.3332 as the global dollar index rose to 95.779.
The firmer yuan followed the release of minutes from the Fed's Jan. 25-26 meeting, which showed the US central bank would make rate hike decisions based on a meeting-by-meeting analysis of inflation and other data.
But overall moves remained muted as global investor concerns around Ukraine continued to offer support for the greenback. A senior US official told reporters on Wednesday that Russian statements about a military pullback, which had prompted a relief rally across global markets, were false.
Russian-backed rebels in eastern Ukraine accused Kyiv government forces on Thursday of shelling their territory with mortars, in violation of agreements aimed at ending the conflict, the RIA news agency said.
The yuan's rise has come despite increasing divergence in monetary policy between China and the United States that has in recent weeks squeezed the spread between benchmark Chinese and US government bond yields to its narrowest since the second quarter of 2019.
On Thursday, the Chinese 10-year yield was 77.6 basis points (bps) higher than the US 10-year yield, down from a 155.5 bps spread in early December.