China's yuan at six-week low as rate outlook lifts dollar

SHANGHAI: China's yuan dropped to a more than six-week low against a broadly stronger dollar on Monday after the People's Bank of China set its daily midpoint rate at its weakest level in more than five weeks.

The dollar ended last week strongly after the U.S. Federal Reserve signalled a sooner-than-expected end to its ultra-easy monetary policy.

In contrast the People's Bank of China has repeatedly said it will not make any sudden policy shifts, and on Monday the benchmark lending rate for corporate and household loans was left unchanged for the 14th straight month at its June fixing.

"The logic for short-term dollar index bullishness is valid.

It may stablise and then continue to rise further," said a trader at a Chinese bank.

But he added that settlement demand from exporters would support the yuan, which could maintain strength against a basket of currencies.

The China Foreign Exchange Trade System (CFETS) yuan currency basket was last at 98.19 on Friday, its highest level since March 2016.

On Monday, the People's Bank of China set the midpoint rate at 6.4546 per dollar prior to market open, its softest level since May 13.

Onshore spot yuan opened stronger at 6.4520 per dollar but reversed course to touch its weakest point since May 6, at 6.4717 per dollar. By midday it was changing hands at 6.4671, 134 pips softer than Friday's late session close.

The offshore yuan weakened to 6.4792 per dollar, from a close of 6.4631 Friday.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said that China's policy response to the pandemic continued to provide a tailwind for the country's currency thanks to persistently higher yields on yuan assets and a gradual opening of China's capital account.

"Since the pandemic outbreak, the PBoC refrained from slashing its policy rate to zero level and managed to keep its conventional monetary policy room," he said, adding that earlier-than-expected Fed tapering would unlikely erode the yuan's yield advantage in the short term.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on adaily basis, stood at 97.83, weaker than the previous day's 97.99.

The global dollar index rose to 92.284 from the previous close of 92.262.