China's yuan touches 3-week high after Fed's dovish stance

SHANGHAI: China's yuan rose to a more than three-week high against the dollar on Monday, benefiting from Federal Reserve Chair Jerome Powell's dovish stance on policy.

The dollar fell as Powell's comments indicated policymakers were in no hurry to exit stimulus and move towards raising rates.

Traders said the pace at which the Fed tapers its bond purchases will be the main factor in the dollar's trend against major currencies. Markets will next look to US job reports due later this week and the Fed's September meeting for more clues on when it will begin to wind down pandemic-era stimulus.

Yuan eases on softer-than-expected midpoint guidance, market eyes Jackson Hole

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4677 per dollar, 186 pips or 0.29% firmer than the previous fix of 6.4863, the strongest since Aug. 6.

In the spot market, onshore yuan opened at 6.4650 per dollar and rose to a high of 6.4640 at one point, the loftiest level since Aug. 6. By midday, it was changing hands at 6.4680, 31 pips firmer than the previous late session.

Gains in the yuan were largely in reaction to a softer dollar, but many traders and analysts expect yuan strength to be short-lived.

"Improving risk appetite supported the yuan, but economic fundamentals are unlikely to push the yuan to the highs hit in May," said Li Liuyang, chief currency analyst at China Merchants Bank.

"The yuan's depreciation risks are greater than appreciation risks," he added, noting that the Fed and PBOC's divergent positions on policy could cause the yuan's premium to shrink and lead to capital outflow.

Markets expect the PBOC to roll out more easing measures and cut the amount of cash banks must hold as reserves later this year to bolster the economy, which has recently shown signs of losing steam as it deals with new COVID-19 restrictions.

"As the Fed shows no urgency for monetary policy tightening, the PBOC should gain more leeway in its monetary policy based on domestic macro dynamics, which have been losing momentum lately," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

By midday, the global dollar index fell to 92.643 from the previous close of 92.67, while the offshore yuan was trading at 6.4665 per dollar.