SHANGHAI: China’s yuan strengthened on Tuesday against the dollar, which weakened amid a sharp pullback in US treasury yields, while Chinese state fund Huijin’s purchase of exchange-traded funds (ETFs) helped stabilised sentiment in China’s markets.

The onshore spot yuan was changing hands around 7.3020 at midday, slightly stronger than the previous late session close, after China’s central bank set the midpoint rate steady at 7.1786 per dollar.

The People’s Bank of China has consistently signalled strengthening bias in the daily yuan fixing since August to contain the currency’s decline amid a struggling economy and a widening gap between Chinese and US yields.

“PBoC is unlikely to loosen its grip on the CNY for fear of an accelerating the capital outflows,” Maybank said in a note on Tuesday.

The dollar index touched one-month low of 105.42 on Tuesday, as US 10-year treasury yields fell sharply from the 5.021% peak, to roughly 4.85%, after influential investors such as Bill Ackman and Bill Gross walked back on their bearish bond view.

“We suspect that USD might have reached an interim peak,” Maybank said, adding the dollar index could fall further “as it continues to pull back from stretched long dollar position.”

Yuan pressured lower by widening yield gap

The yuan also got support from news that China’s state fund Central Huijin Investment started buying exchange-traded funds (ETFs) to aid a sliding stock market.

“The Chinese authorities continue to focus on preserving FX stability and supporting the equities,” said Ken Cheung, Chief Asian FX Strategist at Mizuho Bank.

But “Chinese authorities are still struggling to regain foreign investors’ confidence,” he said.

As the dollar wobbled, traders will closely monitor a slew of economic data that will provide clues to the next steps from the US Federal Reserve, and worries linger that the Israel-Hamas war could escalate into a wider conflict.

“The USD is rightly pausing for now but we think it should grind higher in the months ahead,” HSBC wrote.