SHANGHAI: China’s yuan weakened to a one-week low on Tuesday, as traders saw limited downside for the dollar given strength of the US economy, while confidence in China’s economic growth remained fragile.
The spot yuan was changing hands at about 7.1420 at midday, and is on track for a third consecutive day of declines against the dollar.
Prior to the market open, China’s central bank set the midpoint rate at 7.0982 per dollar, 359 pips stronger than the Reuters estimate, reflecting authorities’ stabilisation efforts.
The dollar index was trading at about 102.5 points, having bounced off a four-month low of 101.76 touched last Thursday.
Zhang Tao, an analyst at China Construction Bank, said US monetary policy was unlikely to pivot swiftly because the world’s biggest economy remained robust. Under such circumstances, “the dollar index won’t trend lower anytime soon”, and the gauge falling below 100 is unlikely, he wrote.
His view was echoed by Galaxy Securities, which said market bets of an early US rate cut were overdone and could be corrected, meaning the dollar index would not decline quickly.
Federal Reserve officials have sought this week to temper rate cut expectations.
The Fed is not pre-committing to cutting interest rates soon and swiftly, and the jump in market expectations that it will do so is at odds with how the US central bank functions, Chicago Fed President Austan Goolsbee said on Monday.
Cleveland Fed President Loretta Mester on Monday also pushed back against financial market expectations of a swift Fed pivot.
The yuan is also not helped by lingering worries about China’s economic health.
The country’s disappointing post-COVID recovery has raised significant doubts about the economy’s foundations after decades of stunning growth, as Beijing faces a tough choice between more debt and slower growth.
On the upside, traders point to big demand for the yuan towards the year-end from exporters who settle dollar receipts.
In addition, following sharp yuan corrections, the appeal of yuan assets will grow for foreign investors, said Guan Tao, chief economist at BOC International.
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