SHANGHAI: China’s yuan strengthened against the US dollar on Friday and looked set for a second consecutive week of gain, due to a broadly stronger Japanese yen and prospects of a shrinking yield spread with the United States.

The safe-haven yen traded near a five-month high against the greenback after an unexpected slump in US manufacturing fuelled fear of a downturn, sending stocks and bond yields tumbling.

Such investor worries and rising bets for a Federal Reserve interest rate cut in September pressured US Treasury yields and their premium over Chinese yields, which has been a key factor weighing down the yuan over the past few years as money flew elsewhere to chase higher returns.

“Market participants are focusing on trading a September Fed rate cut,” said a trader at a Chinese bank, noting US easing would alleviate some of the downside pressure on the yuan.

By 0319 GMT, the yuan was 0.19% higher at 7.2322 to the dollar. If the yuan finishes the late night close at the midday level, it would have gained 0.25% for the week and recorded a second consecutive weekly rise. The yuan is still down 1.8% against the dollar so far this year. It has been under pressure since early 2023 due to domestic woe around a moribund property sector, anaemic consumption and foreign investors staying away from China’s struggling stock market. Prior to market open, the People’s Bank of China (PBOC) set its midpoint rate, around which it allows the yuan to trade in a 2% band, at 7.1376 per dollar, its weakest since November and 1,061 pips firmer than a Reuters’ estimate of 7.2437.

The central bank has been gradually lowering its daily yuan official guidance, well within market projections but with a bias indicating it is allowing some depreciation, traders and analysts said.