China's yuan weakens as dollar pauses before Fed meeting

SHANGHAI: China's yuan eased to its weakest against the dollar in more than a week on Tuesday, as the greenback sat below a one-month high against major peers ahead of a closely watched Federal Reserve meeting.

The yuan's moves were limited following a long holiday weekend as traders adopted a wait-and-see approach, though market players expect the Fed's discussion on how to taper its $120 billion in monthly bond purchases to begin cautiously.

"The expectation is that the US is still going to begin discussion of tapering slowly. In this sort of situation the dollar won't be too weak," said a trader at a foreign bank. "Of course, the pace of US and European policy exits is a risk for dollar changes."

In China, policymakers are plotting a steady course, with the People's Bank of China rolling over 200 billion yuan in maturing one-year Medium-term Lending Facility (MLF) loans on Tuesday.

The bank kept the one-year rate unchanged for a 14th straight month.

"With benign inflationary pressure and RMB appreciation bias, the PBOC lacks motivation to kick off its rate hike cycle for now," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Before the market open on Tuesday, the PBOC set the yuan's midpoint rate at 6.407 per dollar, its weakest since June 4.

Spot yuan opened weaker 6.4050 per dollar and trimmed losses to 6.4045 at midday, 65 pips softer than Friday's late session close. The offshore yuan was slightly stronger at 6.4038 per dollar.

The yuan's weakening this month has been in stark contrast to steady strengthening in May, which prompted a chorus of official warnings against one-sided expectations of yuan appreciation.

An article in the PBOC-backed Financial News on Tuesday quoted analysts as saying that the yuan is approaching a depreciation inflection point, and that it is likely to come under more pressure in the second half.

Traders said tensions between China, the US and Europe could also impact yuan strength. At the first NATO meeting attended by US President Joe Biden, leaders warned that China presents "systemic challenges" and Biden urged standing up to China's authoritarianism and growing military might.

On Tuesday, the US Navy said an aircraft carrier group led by the USS Ronald Reagan has entered the South China Sea as part of a routine mission.