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SHANGHAI: China’s yuan slipped to a more than one-week low against a strengthening dollar and breached a key threshold on Thursday, pressured by a higher-for-longer signal on interest rates by the US Federal Reserve.

The US central bank held interest rates steady on Wednesday but stiffened a hawkish monetary policy stance that its officials increasingly believe can succeed in lowering inflation without wrecking the economy or leading to large job losses.

The Fed’s messaging underpinned the dollar and pressured other currencies, including the yuan, at a time China remains an outlier among global central banks having loosened monetary policy to shore up a stalling economic recovery.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate, around which the yuan is allowed to trade in a 2% band, at 7.1730 per dollar, 2 pips firmer than the previous fix of 7.1732.

Thursday’s official guidance, which was the strongest since Aug. 14, capped the yuan’s downside limit at 7.3165 for the session.

The firmer midpoint drove the yuan’s value against its major trading partners to 98.78, the highest level since May 29. It has now recouped all of its losses made earlier this year and is up 0.11% year-to-date.

The rising basket index comes as the central bank continued its months-long trend of setting official midpoint fixing at firmer-than-expected levels, with traders and analysts interpreting it as an official attempt to rein in yuan weakness.

Thursday’s guidance fix was 1,322 points stronger than Reuters estimate of 7.3052, and was the largest deviation from market projections on record.

“By countering the dollar strength, the yuan actually appreciated against non-USD currencies, extending the gains in simulated (yuan) basket index,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.

“Overall, we expect the PBOC to cap the USD/CNY spot below 7.3 handle to anchor yuan expectation before the National Holiday,” said Cheung, referring to the week-long holidays starting Sept. 29.

In the spot market, the onshore yuan opened at 7.3000 per dollar and quickly weakened past the psychologically important level before changing hands at 7.3002 at midday, 112 pips softer than the previous late session close.

“The yuan is likely to trade sideways for the time being,” said a trader at a Chinese bank, adding that the yield gap between China and the United States is expected to stay wide which makes it hard to support the Chinese currency.

By midday, the global dollar index rose to 105.546 from the previous close of 105.157, while the offshore yuan was trading at 7.309 per dollar.

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