Yuan inches up as markets await Fed policy decision, commentary

SHANGHAI: China's yuan inched higher against the dollar on Wednesday in thin trade as investors stuck to the sidelines, awaiting the outcome of a US Federal Reserve meeting for clues on its policy trajectory.

The dollar held near a one-month high against a basket of currencies as investors wondered if the Fed might alter the language on its stimulus following a recent jump in US inflation.

Any changes to the Fed's rhetoric could bring more volatility to major currencies, equities and bond markets as many economies are still struggling to recover from pandemic-induced slumps.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at a three-week low of 6.4078 per dollar, 8 pips weaker than the previous fix of 6.407.

In the spot market, onshore yuan opened at 6.4040 per dollar and was changing hands at 6.4039 at midday, 31 pips firmer than the previous late session close.

The onshore spot yuan swung in an extremely thin range of less than 30 pips in the morning session, reflecting caution ahead of the Fed's decision later in the day (1800 GMT) and Chair Jerome Powell's news conference (1830 GMT).

Some analysts and market participants said that even if some US economic data were not solid enough to force the Fed to start tapering any time soon, they could affirm a recovery in the world's largest economy was on track, which could alleviate upward pressure on the yuan.

"If US and Europe recover their production, it would imply less demand for some Chinese goods. A moderation in China's export growth and smaller trade balances may ease some CNY's appreciation pressure," said Marco Sun, chief financial markets analyst at MUFG Bank in Shanghai.

Sun expects a smaller chance of sustained one-way appreciation of the yuan in coming months.

The yuan's strong rally to three-year highs against the dollar in May prompted a flurry of warnings from policymakers about speculative bets on the currency, prompting a slight pullback and more cautious trade.

Separately, Guan Tao, a former senior official at China's foreign exchange regulator, warned that long-term appreciation in the yuan could have a large negative impact on China's economy even if there was no substantial effect on the country's exports in the short-term.

By midday, the global dollar index stayed flat at 90.533 from the previous close of 90.533, while the offshore yuan was trading at 6.4048 per dollar.