SHANGHAI: China's yuan fell to its weakest in more than 19 months on Thursday after the central bank set its fixing at a nearly 19-month low, with the dollar near a two-decade peak following new data showing more persistent U.S inflation.
The US data, which showed consumer price growth moderating less than expected, raised investor worries that the Federal Reserve may need to accelerate policy tightening to keep inflation under control.
That is likely to exacerbate conditions that have contributed to the yuan slipping nearly 6% against the dollar since the end of March.
While traders said a slightly stronger-than-expected yuan fixing suggested the People's Bank of China (PBOC) hopes to ease the pace of the yuan's fall, analysts at Citi said the mild regulatory reaction to the yuan's recent declines suggests tacit approval of depreciation.
A weaker yuan could potentially help support the country's export sector and battered small businesses, Citi said.
Before the market open, the PBOC set the yuan's daily midpoint rate at 6.7292 per dollar, firmer than a Reuters forecast of 6.7362 per dollar, but still its weakest since Oct. 16, 2020.
China’s yuan slides to 6-month low as tightening prospects help dollar
Onshore spot yuan opened at 6.7355 per dollar and slipped to 6.7630 in morning trade, its weakest since Sept. 30, 2020. By around midday in China it was changing hands at 6.7479 per dollar, 243 pips softer than Wednesday's late session close.
Traders said poor market liquidity, affected by work-from-home orders from financial institutions in Beijing amid tightening COVID-related lockdowns in the capital, had also boosted exchange rate volatility.
On Thursday, a widening spread between the onshore yuan and its offshore counterpart, which traded at 6.7804 per dollar, pointed to solidifying expectations that the yuan could fall further.
"The Chinese economy is set to slow further as the property softness and COVID-induced consumption (weakness) remain the key drag," Hao Zhou, senior economist at Commerzbank said in a note, noting a weakening bias for the Chinese currency. Faster-than-expected Fed tightening could create further depreciation risks.
The PBOC is likely to opt for easing to prevent a full-blown economic slowdown, but will probably step in to reduce market volatility "when they deem necessary," he said.
China is considering new incremental policies to prop up growth and will take steps when necessary, a senior official of China's Communist Party said on Thursday.
Zhou forecast a level of 6.70 per dollar for the onshore yuan by the end of 2022, but said he plans to revisit the forecast in coming months.
Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.8033.
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