SHANGHAI: A stronger dollar weighed on China's yuan on Friday after robust US economic data boosted expectations that the US Federal Reserve will move soon to taper its asset purchases, and as China's central bank set its daily fixing at a one-week low.
After opening at 6.4550 per dollar, spot yuan touched its weakest point since Sept. 9 at 6.4626. It was guided lower after the People's Bank of China set its midpoint rate at 6.4527 prior to market open, its softest fixing since Sept. 10.
While the unit clawed back losses by midday to trade at 6.4548, slightly firmer against the greenback on the day, traders said it would continue to be led by moves in the US dollar index.
The offshore yuan also ticked up against the dollar on Friday to trade at 6.4525.
"USDCNY rebounded more than 300 pips from lows, still mainly impacted by the direction of the dollar index and rising expectations of Fed tightening," said a trader at a foreign bank. "It's possible it could still return to the 6.5 handle."
The dollar index hit a 3-week high of 92.965 on Thursday after US retail sales unexpectedly increased in August, defying slumping consumer confidence. It edged down to 92.86 on Thursday.
China's yuan weakens as traders eye Fed policy meeting
Strong retail sales data could potentially temper expectations for a sharp slowdown in US economic growth in the third quarter. Economists polled by Reuters this week had pushed their expectations back to November for a tightening policy shift by the US central bank.
Moves by US monetary authorities toward tightening contrast with a focus on targeted easing in China. Concerns over the possible broader financial impact of a debt crisis at China Evergrande Group and a probable period of structural decline of the property sector could also weigh on the yuan, said Jonathan Petersen, markets economist at Capital Economics.
"Growing financial stability risks (whether perceived or realised) may increase the likelihood of capital flight by both domestic and foreign investors ... To avoid a crisis and manage structural strains amid slowing growth, we expect further easing from policymakers in China," he said in a note.
"We think that there will be more cuts to the RRR and the PBOC's policy rates in the coming months. Cuts to the RRR have tended to precede falls in the renminbi, and we think this pattern will hold."
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