China's yuan eases, but basket index climbs to 5-1/2-year high

SHANGHAI: The Chinese yuan eased to a three-week low against a firmer dollar on Thursday, while its value against the currencies of major trading partners touched a fresh 5-1/2-year high.

The People's Bank of China (PBOC) set the midpoint at 6.4853 yuan per dollar prior to the market open, 62 pips or 0.1% stronger than the previous fix of 6.4915.

The stronger official guidance rate has pushed China's trade-weighted yuan basket index to 98.88, the highest since March 10, 2016, and up 4.26% so far this year, according to Reuters' calculations based on official data.

Analysts and traders said the firmer basket index reflected the yuan's resilience against the dollar relative to its peers.

The dollar index has gained about 1.5% this month amid talk of the U.S. Federal Reserve's plan to taper its asset purchases, piling downward pressure on emerging market currencies, but the yuan only weakened 0.47% to the greenback.

The spot market opened at 6.4845 yuan per dollar and was changing hands at 6.4928 at midday, 87 pips weaker than the previous late session close.

Ken Cheung, chief Asian FX strategist at Mizuho Bank, said the yuan's broad strength against the basket showed the central bank wanted a stable yuan for the time being.

A breach of the psychologically important 6.5 per dollar level would be a clear signal that the People's Bank of China (PBOC) was willing to allow more weakness in the local currency, he added.

"Markets will closely watch the PBOC's actions after the annual Jackson Hole policy symposium," Cheung said, noting that expectations are high for the Fed to reveal the timing oftapering then.

Many market observers believe the yuan could test the 6.5 threshold, citing a range of negative factors for the currency.

These include the spread of the Delta coronavirus variant, a slowing domestic economy, Beijing's crackdown on the tech sector and a firmer dollar.

"Clearly, there is further downside bias for the Chinese currency if negative headlines persist," said Zhou Hao, senior emerging markets economist at Commerzbank.