Yuan eases to 3-week low after Fed takes more hawkish outlook

SHANGHAI: China's yuan weakened on Thursday to a more-than-three-week low against a broadly stronger dollar as the US Federal Reserve adopted a more hawkish outlook.

The dollar rose to its highest level in almost two months versus major peers after the Fed brought forward its projections for the first post-pandemic interest rate hikes into 2023, citing an improved health situation and dropping a long-standing reference that the crisis was weighing on the economy.

The firmer dollar pressured the yuan's official guidance rate and spot prices. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4298 per dollar, 220 pips or 0.34% weaker than the previous fix of 6.4078, the weakest since May 24.

Several traders and analysts said the official fixing came in much weaker than their forecasts. Thursday's midpoint was 67 pips weaker than Reuters' estimate of 6.4231.

In the spot market, onshore yuan opened at 6.3977 per dollar and eased to a low of 6.4258, the softest level since May 24. By midday, it was changing hands at 6.4220, 251 pips weaker than the previous late session close.

"I think the central bank is comfortable with the cross rate trading at current levels," said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, maintaining his view the yuan would be trading at around 6.45 by the end of the month.

Cheung added that the central bank had warned the market multiple times of a possible rebound in the dollar and a corresponding retreat in the yuan.

China FX Market Self-Regulatory Framework said in a statement late on Wednesday that companies should be on guard against the risks of yuan depreciation. Factors that may trigger yuan depreciation include the Fed exiting from its quantitative easing, and a robust US economic recovery boosting the dollar.

The CFETS index, measuring the yuan's strength against the currencies of its major trading partners, rose to 98.07 on Thursday, according to Reuters calculations based on official.

Market participants widely believe the 98-level could act as the ceiling for the index, which officially publishes on a weekly and monthly basis. A too high reading could suggest China might be suffering a trade disadvantage against its peers.

Meanwhile, a trader at a Chinese bank said some corporate clients converted dollar earnings during the morning to take advantage of the weaker yuan, whioch helped limit the Chinese currency's decline.

By midday, the global dollar index fell to 91.397 from the previous close of 91.406, while the offshore yuan was trading at 6.426 per dollar.