Yuan pulls up from one-week low as PBOC sets strongest fix in three years

SHANGHAI: China’s yuan bounced from a one-week low on Thursday after the central bank set its strongest midpoint fix in three years, even as the US dollar held steady on safe-haven demand amid escalating Middle East tensions.

Spot yuan opened at 6.8005 per dollar and was last trading at 6.796 as of 0207 GMT, 92 pips or 0.11% firmer than the previous late session close.

Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.8036 per dollar, its strongest since February 10 2023, and 58 pips weaker than a Reuters’ estimate.

The spot yuan is allowed to trade a maximum of 2% either side of the fixed midpoint each day.

The central bank has been guiding the yuan weaker than market expectations since late last year to slow the pace of appreciation.

But the fixing gap has narrowed sharply from the 500-plus pips seen at times last month, signaling a more defensive policy stance amid a firm dollar.

The dollar held firm against most major currencies on Thursday as renewed Gulf tensions revived safe-haven bids while surging oil prices boosted rate hike bets.

Meanwhile, concern about high inflation mounted at the US central bank’s meeting last month, as officials followed Federal Reserve Chairman Kevin Warsh’s lead to a more stripped-down policy statement even amid concerns that price increases were broadening and might require interest rate hikes.

China’s producer price inflation surged for a fourth straight month in June to its highest since July 2022, indicating that heightened cost pressures squeezed manufacturers whose pricing power remained constrained by weak demand.

China’s monetary policy is placing greater emphasis on being “forward-looking, flexible and targeted,” and once PPI peaks, there is room for increased expectations of broad-based Reserve Requirement Ratio (RRR) and interest rate cuts, analysts at China Galaxy Securities said in a note.

 China’s central bank said on Wednesday it would maintain an appropriately loose monetary policy and ramp up financial support to revive domestic consumption, adding that the economy

 was facing a mismatch between strong supply and weak demand.

The offshore yuan traded at 6.7995 yuan per dollar, up about 0.1% in Asian trade.

The dollar index, which measures the greenback against a basket of six currencies, was 0.059% lower at 100.96.

The yuan’s second-half trajectory will hinge on the durability of the trade surplus amid US tariff risks and exporter dollar conversion flows, as well as the dollar’s direction and the Fed’s policy stance, which will likely cap appreciation, said analysts at research firm Ratingdog in a note.

The July Politburo meeting will be a key sentiment catalyst - any clearer signals of economic support could boost risk assets and yuan confidence, the analysts said.