Yuan up slightly as markets take US inflation spike in stride

SHANGHAI: China's yuan inched up on Friday and looked set for a marginal weekly gain as the dollar failed to get a lift from accelerating US inflation, with markets largely agreeing with the Federal Reserve that rising consumer prices will be transitory.

Data overnight showed annual US consumer prices rose the most in nearly 13 years as a reopening economy boosted demand for travel-related services, and one-off factors provided enough reasons for traders to go along with the Fed's narrative.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at a one-week high of 6.3856 per dollar, 116 pips or 0.18% firmer than the previous fix of 6.3972.

In the spot market, onshore yuan opened at 6.3853 per dollar and was changing hands at 6.3868 at midday, 60 pips firmer than the previous close, and is set to finish the week with modest gains.

Investors are now expected to switch their attention to the Fed's policy meeting next week for clues on changes to monetary policy, traders say. Any shift in policy rhetoric could stoke volatility in major currencies.

"Both yuan and the dollar were likely to continue trading in ranges before the Fed meeting," said a trader at a foreign bank.

He said that Chinese regulators have also taken a sanguine approach to domestic inflation, and recent comments around the yuan should stabilise the markets for the time being.

PBOC Governor Yi Gang told a financial forum a day earlier that inflation is "basically under control" and the central bank would keep the yuan exchange rate basically stable.

The yuan has recently raised eye brows, as it has risen sharply by around 12% against the dollar since May 2020 and hit its strongest levels in more than three years.

"PBOC Governor Yi Gang reaffirmed that the current level of accommodation is appropriate," Win Thin, global head of currency strategy at Brown Brothers Harriman, said in a note.

Separately, official data showed that China's foreign exchange deposits continued to grow and hit a record high of $1.01 trillion at the end of May, boosted by huge trade surplus and continued capital inflows into Chinese stocks and bonds.

By midday, the dollar index measured against a basket of key currencies fell to 89.994 from the previous close of 90.074, while the offshore yuan was trading at 6.382 per dollar.