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SHANGHAI: China’s yuan touched a one-week high against the US dollar on Tuesday, while the trade-weighted yuan index hit a fresh record, as investors eyed Chinese assets as a potential safe harbour amid heightened market volatility over the Ukraine crisis.

However, some analysts cautioned that an imminent US interest rate hike and possible deterioration in Sino-US relations over the crisis could heap pressure on the Chinese currency.

The yuan strengthened to as much as 6.3089 per dollar in morning trading, the highest level since March 1, after the People’s Bank of China set a surprisingly firmer midpoint rate.

The CFETS Yuan basket index, which values the Chinese currency against peers of its major trading partners, extends gains to hit a fresh record high.

“We see resilient fundamentals in onshore China bonds and the CNY,” Paula Chan, senior portfolio manager at Manulife Investment Management wrote on Tuesday.

“We expect a rebound in China’s economy in the second half of 2022 and further monetary easing to attract inflows from global investors into the China bond market.”

The view was echoed by Maybank analysts Saktiandi Supaat and Fiona Lim, who wrote: “China’s relatively lower inflation environment, semi-guided currency regime have imbued safe haven attributes in the currency during this period of risk aversion.”

The bank expects the yuan’s trade-weighted index to “remain well supported in an environment of weak risk appetite.”

However, a trader at a Chinese bank saw limited room for the yuan to rise against the dollar, pointing to a widely expected interest rate hike later this month by the US Federal Reserve.

Maybank also cautioned that amid the Russia-Ukraine conflict, “any signs of deterioration in the relationship between the US and China could still undermine the CNY.”

Underlining Beijing’s clash with Washington, Foreign Minister Wang Yi on Monday praised his country’s friendship with Russia as “rock solid”, and urged Western countries to respect Russia’s “legitimate security concerns.”

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