SHANGHAI: China's yuan strengthened against the dollar on Wednesday after the central bank set a much firmer guidance rate following the greenback's global fall on Federal Reserve Chair Janet Yellen's cautious rate-hike approach.
The dollar index slid 0.8 percent against a basket of six major currencies on Tuesday, its biggest one-day fall in nearly two weeks, and the loss was retained in Wednesday morning Asian trade.
Yellen said on Tuesday the US central bank should proceed only cautiously as it looks to raise interest rates, pushing back on a handful of her colleagues who have suggested another move may be just around the corner.
The People's Bank of China set the yuan's midpoint rate at 6.4841 per dollar prior to market opening, the strongest in a week and 0.34 percent firmer than the previous fix of 6.506.
In the spot market, the yuan opened at 6.4870 per dollar and stayed largely flat before moving closer to the midpoint at 6.4858 by midday, 0.32 percent stronger than the previous close.
A trader at a Chinese commercial bank in Shanghai said there were "bouts of dollar purchases" during the morning. But when the yuan weakened toward the 6.4870 level, state banks supported it in an effort to "boost the credibility of the midpoint", the trader said.
Since early 2016, state-owned banks have routinely intervened in the currency market to defend the yuan's value on behalf of the central bank.
Onshore one-year yuan/dollar deliverable forwards were quoted at 6.5447 around midday. That implies expectations that the yuan will depreciate less over 12 months than was implied by Tuesday's close of 6.5753.
The offshore yuan was trading 0.1 percent weaker than the onshore spot at 6.492 per dollar at midday. It was trading stronger than its onshore counterpart on late Tuesday trade, being more responsive to the dollar's slide.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.646, or 2.44 percent weaker than the midpoint.
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