China's yuan dips as inflation concerns hit risk appetite

SHANGHAI: China's yuan weakened on Tuesday, pulling back from a nearly three-year high against the dollar a day earlier amid growing global concerns over inflation even as the central bank set firmer guidance.

Global risk appetite took a hit overnight ahead of the release of US inflation data as traders worried that rising price pressures could lead to policy tightening.

"The market is concerned about inflation, especially the recent jump in commodities. China's PPI data released in the morning also came in above expectations," said a trader at a foreign bank.

China's factory gate prices rose at the fastest rate in three-and-a-half years in April, data showed on Tuesday, adding to inflation concerns as the world's second-largest economy gathers momentum after strong first-quarter growth.

The People's Bank of China (PBOC) is gradually scaling back stimulus to contain financial risks, and most analysts do not see inflation rising to a point where it will trigger a major change in policy.

The PBOC set the yuan's daily midpoint at 6.4254 per dollar prior to market open, after the currency finished its onshore session near three-year highs on Monday.

The fixing was also near three-year highs, but came in line with market expectations, which traders said could suggest that regulators are tolerating recent yuan strength.

"The gap (in the fixing) yesterday was a little bit big, possibly because of the excessive volatility on Friday. Today I feel the gap has shrunk. We need to continue to watch it," said Tommy Xie, economist at OCBC Bank in Singapore.

Spot yuan opened at 6.4250 per dollar and was changing hands at 6.4266 at midday, 110 pips softer than Monday's late session close.

Offshore yuan traded at 6.4235 per dollar, softer than Monday's close of 6.4226.

The yuan's weakness came after the global dollar index on Monday touched its weakest level since late February. It was little changed on Tuesday at 90.253.

"Further China-US growth data divergence and USD sell-off could push the CNY towards the 6.40 handle again, and the PBOC's FX policy stance will remain in play," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

But Cheung said the central bank is likely to pay more attention to the negative impact of yuan appreciation on growth, noting that the yuan is at three-year highs against a trade-weighted basket of currencies.