SHANGHAI: The yuan edged up against the US dollar on Wednesday as Premier Li Keqiang pledged China will not engage in competitive currency devaluation, a day after Beijing and Washington plunged deeper into a trade war with more tit-for-tat tariffs.
China will not weaken the yuan to boost exports, Li said in a speech at the World Economic Forum in Tianjin, reiterating past promises by Chinese officials not to use the currency as a weapon in the trade dispute.
Washington and Beijing triggered more tariffs on Tuesday in the latest escalation between the world's largest economies. China added $60 billion of US products to its import tariff list in retaliation for President Donald Trump's planned levies on $200 billion worth of Chinese goods.
But Beijing is running out of room to respond to any further US tariffs on a dollar-for-dollar basis, raising concerns it may resort to other measures to weather what could be a protracted trade battle.
After largely standing aside and letting the yuan weaken for 10 straight weeks, China's central bank took steps in August to steady the currency.
But the yuan is widely expected to come under renewed pressure eventually as the trade dispute grinds on and Beijing increasingly loosens policy conditions to cushion the economy.
Prior to the market opening on Wednesday, the People's Bank of China (PBOC) set the midpoint rate at 6.8569 per dollar, 15 pips weaker than the previous fix 6.8554.
Wednesday's official guidance rate was 78 pips firmer than Reuters' estimate of 6.8647 per dollar.
In the spot market, the onshore yuan opened at 6.8661 per dollar and was changing hands at 6.8504 at midday, 111 pips firmer than the previous late session close and 0.09 percent stronger than the midpoint.
The offshore yuan was trading at 6.8495 per dollar as of midday.
Iris Pang, Greater China economist at ING, sees more downside room for the yuan and expects it to hit the psychologically important 7 per dollar level.
"Crossing 7.0 seems to be possible with the escalation of trade war though it could be temporary as the next day's fixing should manage the USD/CNY back to below 7.0. But touching 7.0 could be a new norm," she said in a note to clients.
Moody's expects Chinese authorities would use expanded policy tools to manage a rise in volatility over time.
"With more experience in managing currency flexibility, and tighter and effective controls on capital flows in place, we do not expect large-scale intervention to defend the renminbi involving significant use of foreign reserves," analysts at the ratings agency said in a note.
Markets are closely watching the US dollar and yields for broader exchange rate direction, with the Federal Reserve widely expected to hike interest rates next week and again in December.
Ken Cheung, senior Asian FX strategist at Mizuho Bank, said traders also will be eyeing US political developments heading up to mid-term elections in November which could impact Trump's policies.