SHANGHAI: China's yuan slipped against the dollar on Monday as rising inflation and concerns Russia could invade Ukraine supported the greenback, although it firmed against a basket of currencies.
Traders said that while corporate demand for the yuan has eased following the week-long Lunar New Year holiday, it continues to provide some support for the currency.
"In the near term the market may be more affected by the situation in Russia and Ukraine, and the dollar will continue to rise, but the yuan should be able to maintain a narrow range," said a trader at a Chinese bank.
On Monday, the People's Bank of China (PBOC) set the yuan's midpoint rate in line with market expectations at 6.3664 per dollar, firmer than Friday's fix of 6.3681.
Spot yuan opened at 6.3610 per dollar and edged up to 6.3595 at midday, still 53 pips weaker than the late session close on Friday.
The offshore yuan eked out a small gain against the dollar, firming to 6.3648 from a close of 6.3668.
Another trader at a foreign bank said that a worsening situation in Ukraine could spark a jump in commodity prices, which might lead to both a stronger dollar and a rise in the yuan against other currencies.
The trade-weighted China Foreign Exchange Trade System (CFETS) basket rose 0.19% on Monday morning to touch a one-week high of 102.81, according to Reuters calculations.
The basket index is below record highs touched in late January, but remains buoyed by China's solid goods trade surplus and contained services trade deficit, said Qi Gao, FX strategist at Scotiabank.
In the longer term, analysts and traders say the yuan faces increasing headwinds to appreciation as monetary policy diverges between China and the United States.
While markets have scaled back their certainty of a half-point rate hike by the US Federal Reserve at its March meeting, Fed futures continue to point to expectations of as many as seven rate rises this year.
In contrast, China's central bank is expected to continue to pursue targeted easing to bolster a slowing economy, with a cut in its medium-term lending rate possible this week.
The PBOC said on Friday it would keep liquidity reasonably ample and step up financing support for key sectors and weak links of the economy, but not resort to "flood-like" stimulus.
Scotiabank's Gao said that while a narrowed yield advantage could weigh on the yuan exchange rate, the impact of any move this week may be limited.
"A rate cut could revive China's economic growth, which is positive for the yuan exchange rate. In general, a MLF rate cut would not move the yuan exchange rate too much if it is delivered, but it could send forward points lower," he said.