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SHANGHAI: China’s yuan slipped to a more than two-week low against the dollar on Monday after soaring US inflation pushed up Treasury yields and lifted the greenback to its highest in four weeks against a basket of peers.

Data released on Friday showed US consumer prices had jumped in May, fueled by record gasoline prices and increasingly costly services, raising the prospect of continued aggressive policy tightening by the Federal Reserve.

With the Fed widely expected to announce a second 50-basis-point rise in interest rates on Wednesday, traders said the yuan would continue to face pressure in the near term. Traders and analysts also flagged a widening spread between the onshore yuan and its more freely traded offshore counterpart as an indication of market concern.

Yuan set for worst week in a month amid Covid, monetary policy headwinds

“Offshore-onshore spread has widened to around 170 pips … versus near-neutral levels in early-Jun, with regional risk aversion on display,” analysts at Maybank said in a note. But they added that stronger-than-expected yuan fixings by the central bank suggested “resistance against overly sharp yuan depreciation.”

Market pricing indicates roughly a two-thirds chance of at least 125 basis points of hikes across the Fed’s next two meetings, according to the CME’s FedWatch tool.

“If the Fed’s stance is more hawkish than expected, the yuan could test the 6.8 mark if the US index breaks through the year’s highs. But a sharp depreciation is unlikely,” said a trader at a Chinese bank.

Traders said tightening policy by the European Central Bank and others might limit the upside of the dollar index. The Bank of England is expected to announce its fifth interest rate hike since December this week.

While many global central banks are raising interest rates to combat inflation, Chinese authorities remain focused on stabilising a slowing economy.

A surge in new bank lending in May illustrated policymakers’ attempts to pull the economy out a slump exacerbated by COVID-19 lockdowns.

China’s one-year dollar/yuan swaps dropped deeper into negative territory on Monday, reflecting the policy divergence between the world’s two largest economies.

One-year swap points touched a low of -295 points, the lowest since January 2019.

Before the market open, the People’s Bank of China (PBOC) set the yuan’s daily midpoint fixing at at 6.7182 per dollar, its weakest since May 27.

Spot yuan opened at 6.7350 per dollar and slipped to 6.7382 around midday, 301 pips weaker than Friday’s late session close.

The offshore yuan was more than 200 pips weaker than its onshore counterpart, softening to 6.7574 per dollar from a close of 6.7330 on Friday.

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 6.7576.

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