SHANGHAI: China's yuan dropped to a one-month low against the dollar on Wednesday before clawing back some losses, dragged by a worsening power crunch that is threatening the growth outlook of the world's second-biggest economy.
The weakness also reflected a firmer dollar, which traded near its strongest levels of the year on higher US yields and the prospect of a Federal Reserve exit from its pandemic-era stimulus.
The yuan opened at 6.4800 per dollar, the lowest level since August 27, and changed hands at 6.4674 at midday. The People's Bank of China set the midpoint at 6.4662 per dollar prior to market open, weaker than the previous fix of 6.4608.
But China's trade-weighted CFETS Yuan Basket Index remained strong, rising to its highest level in 5-1/2 years. Traders said authorities would likely want to contain market volatility ahead of the week-long National Day holiday that starts on Friday, limiting the yuan's losses.
China's yuan inches up, worries over economic recovery cap gains
China is suffering from a worsening power crunch, as a shortage of coal supplies and toughening emissions standards have pushed coal prices to record highs. The power shortage has hurt production and sparked widespread electricity curbs, dimming the economy's growth outlook.
On Wednesday, China's all-powerful economic planning agency attempted to reassure residents and businesses in areas hardest hit by shortages that it has the coal use and supply situation under close watch.
China's power shortages won't be resolved overnight, Capital Economics wrote, potentially putting downward pressure on the yuan.
"Power rationing will constrain industrial activity until demand weakens enough to bring the domestic electricity market back into equilibrium."
Meanwhile, US Treasury yields have surged in recent sessions amid tapering expectations, with the benchmark 10-year yield last at 1.5548%.
The Federal Reserve said last week it will likely begin reducing its monthly bond purchases as soon as November and signalled interest rate increases may follow more quickly than expected.
"The wolf is really coming," said a trader at a foreign bank in China.
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