SHANGHAI: China’s yuan firmed to its strongest against the US dollar in five months on Wednesday, as the dollar weakened after a previously hawkish Federal Reserve policymaker said US interest rate cuts could begin in months if inflation came down.

The comments by Fed Governor Christopher Waller fueled expectations that US rates have peaked, and the yield gap between US 10-year Treasuries and China’s benchmark bonds narrowed to 161 basis points, the tightest since mid-September.

China’s offshore yuan strengthened more than 300 pips in late session on Tuesday to 7.1244 as the dollar weakened.

Prior to the market’s opening, the People’s Bank of China set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1031 per US dollar, 101 pips firmer than the previous fix 7.1132 and 309 pips firmer than Reuters’ estimate.

The difference between the official midpoint rate and market’s estimate was steady at around 300 pips, continuing to exert the policy warning against any yuan bears out there, Maybank analysts said.