China's yuan firms as dollar drops on US rate outlook

SHANGHAI: China's yuan strengthened on Tuesday as investors tempered earlier expectations that the US central bank could hike interest rates soon, weighing on the dollar.

But traders said a robust US economic recovery and strong commodities would put a floor under a falling dollar index.

"There's likely to be a limit to the downside for the US dollar," said a trader at a foreign bank, adding that the greenback was biased toward rangebound fluctuation. "The yuan also shouldn't have far to run."

Dallas Federal Reserve President Robert Kaplan on Monday reiterated that he does not expect interest rates to rise until next year, fuelling a further decline in bets that inflationary pressure could force the Fed to act sooner.

That put a drag on the dollar, which had earlier rallied on expectations that the Fed could move to raise rates in response to hotter-than-expected inflation data.

The global dollar index fell to 90.11 from the previous close of 90.184.

Before the market open, the People's Bank of China set the yuan's daily midpoint at 6.4357 per dollar, weaker than the previous fix of 6.4307.

Spot yuan opened at 6.4324 per dollar and strengthened to 6.4278 by midday, 116 pips firmer than Monday's late session close.

The offshore yuan firmed to 6.428 per dollar from a close of 6.4414.

Ken Cheung, Asian FX strategist at Mizuho Bank, said the yuan was also helped by China's robust growth momentum and the country's resilience to the resurgence of COVID-19 infections in Asia.

Analysts and traders also say that relatively tight cash conditions ahead of monthly tax payments due this week continue to provide some support for China's currency.

"How tight funds will get depends on how the central bank offsets," analysts at Jianghai Securities said in a note. "But even if we rely on the market to self-regulate liquidity levels, this crunch will not last too long."

On Tuesday, the volume-weighted average rate of the benchmark overnight repo traded in the interbank market was at 2.111%, just shy of more than two-week highs touched a day earlier.