China's yuan hits 3-year high; investors eye Mideast peace talks

SHANGHAI: China’s yuan inched firmer to hit a more than three-year high against the dollar on Tuesday, but gains were capped as investors cautiously evaluated Middle East peace talks.

The onshore yuan rose to a high of 6.7621 per dollar in morning trade, the strongest level since February 2023, before changing hands at 6.7625 as of 0315 GMT.

Its offshore counterpart followed the strengthening trend and last traded at 6.7609.

 Lebanon announced on Monday a partial ceasefire between Hezbollah and Israel, in what would amount to a limited de-escalation of a conflict that has killed thousands of people and inflamed the broader US-Israeli war with Iran.

Earlier, Iranian state media said Tehran was halting indirect negotiations with the US and might end the ceasefire, citing the war in Lebanon. US President Donald Trump, meanwhile, said that talks with Iran were ongoing “at a rapid pace.”

“Markets remain hopeful that the US and Iran will soon finalise a deal to end the conflict and open up the Strait of Hormuz,” ANZ analysts said in a note.

They revised their forecasts for the yuan firmer for the second and third quarters to 6.75 and 6.73, respectively, from 6.80 and 6.75 in a prediction published last month, to “reflect recent yuan strength but maintain year-end target of 6.70.”

Before the market opened, the People’s Bank of China (PBOC) set the midpoint rate at 6.8187 per dollar, but 467 pips weaker than a Reuters estimate of 6.7720. The spot yuan is allowed to trade 2% either side of a fixed midpoint each day.

Based on Tuesday’s official midpoint guidance fix, the yuan’s trade-weighted value against its major trading partners, as measured by the CFETS yuan basket index, rose to a near 16-month high of 100.9, according to Reuters calculations based on official data.

The Chinese yuan has been one of the best-performing emerging market currencies since the outbreak of the Iran war in late February, with analysts at Barclays expecting the yuan to continue to outperform its peers.

“While there may be scope for more outperformance, we think the authorities will become increasingly nervous of any move above 102 in the CFETS, which would bring it to the highest levels since around August 2022,” they said in a note.

The yuan has gained 3.3% against the dollar year-to-date, while the CFETS yuan basket index was up about 3% during the same period. A too-strong currency could undermine export competitiveness, traders and analysts said.

The central bank has been setting softer-than-expected midpoint fixings, a move that market participants widely interpreted as an attempt to keep the market stable.