Yuan hits 2-week high before paring gains as investors watch dollar moves

SHANGHAI: China's yuan briefly touched a two-week high against the US dollar on Wednesday before giving back all the gains at midday, as investors became cautious and awaited clear guidance from the greenback's movements in global markets.

Earlier gains in the yuan were tracking a softer dollar, currency traders said. The greenback hit a two-week low against a basket of currencies after US bond yields declined as traders rolled back aggressive expectations that the Federal Reserve will tighten its policy earlier than pledged.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a near two-week high of 6.5384 per dollar, 143 pips or 0.2% firmer than the previous fix of 6.5527.

In the spot market, onshore yuan opened at 6.5400 per dollar and jumped to 6.5361, the strongest level since March 25. It quickly pared gains and traded at 6.5413 at midday, 4 pips weaker than the previous late session close.

Several traders said investors adopted a rangebound trading strategy to lock in quick profits for now, as some believed the dollar's recent weakness should be temporary.

A trader at a Chinese bank said the correction in the dollar would not last long as the massive stimulus package in the United States should prop up the dollar in the long run to pile some downside pressure on the yuan.

Li Liuyang, chief currency analyst at China Merchants Bank, also pointed out that the yuan's recent performance was largely tracking movements in the dollar rather than fundamentals.

"The next move of the dollar will largely determine the direction of the yuan," Li said.

Separately, official data showed that overseas investors added to their holdings of Chinese bonds in March, but net purchases slowed as narrowing spreads and a weaker yuan reduced their appeal.

The yuan was yet to react to comments made in a recent central bank working paper, which said that China should set up a yuan exchange rate futures market at an appropriate time and guide domestic entities to use offshore currency futures markets to hedge exchange rate risks.

The global dollar index rose to 92.34 at midday from the previous close of 92.306, while the offshore yuan was trading at 6.5446 per dollar.