Yuan rises to 1-week high on weaker dollar, tighter cash conditions

SHANGHAI: The yuan inched up to a more than one-week high against an easing dollar on Thursday, with tighter cash conditions in China's interbank money market also lending support.

The dollar remained on the backfoot against most major peers on Thursday as optimism that a massive US stimulus package under the new Joe Biden administration will bolster growth sapped demand for safe-haven currencies.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4696 per dollar, 140 pips or 0.2% firmer than the previous fix of 6.4836.

In the spot market, onshore yuan opened at 6.4560 per dollar and rose to a high of 6.4555 at one point, the strongest level since Jan. 13. At midday, it was changing hands at 6.4610, 20 pips firmer than the previous late session close.

Traders said markets were cautiously awaiting more clues on President Biden's foreign and trade policy stance towards China. Often fraught Sino-US relations have been one of the key factors influencing the yuan in over the past few years.

A trader at a Chinese bank said the market was likely to consolidate at current levels in the near term, with support from rising corporate demand for the currency ahead of the Lunar New Year holiday next month.

Companies usually convert their dollars to yuan before the week-long holiday to make various payments, and such conversion could drive the yuan higher.

China's primary short-term money rates surged this week, with some key tenors rising to the highest level since the early days of the coronavirus pandemic a year ago, driven by rising seasonal cash demand, despite the central bank offering huge amounts of short-term funds.

On Thursday, the volume-weighted average rate of benchmark overnight repo traded in interbank market rose to 2.5869%, highest since Jan. 16, 2020.

The global dollar index fell to 90.311 at midday, when the offshore yuan was trading at 6.4592 per dollar.