Yuan at 3-1/2-year high as US inflation dims Fed rate hike prospects

SHANGHAI: China’s yuan firms to a 3-1/2-year high against the dollar on Thursday, as US inflation data weighed on the greenback and dimmed prospects for an imminent Federal Reserve rate hike.

US consumer prices were in line with expectations, easing appreciation pressure on the dollar in the near term and lending the yuan a broadly steady to slightly firmer bias, market participants said.

The spot yuan opened at 6.7455 per dollar and was last trading at 6.7441 as of 0251 GMT, 18 pips firmer than the previous late session close.

It hit 6.74 per dollar in early trade, the strongest since February 2023.

“Two muted inflation prints in a row should be sufficient to quell worries that price pressures are broadening beyond energy,” DBS analysts said in a note, adding that a cooling labour market removed the case for near-term Fed tightening.

The greenback’s upside was also capped by the worst US budget deficit since March 2021, they said.

Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.7888 per dollar, 418 pips weaker than a Reuters’ estimate. The spot yuan is allowed to trade a maximum of 2% on either side of the fixed midpoint each day.

The central bank has been gradually strengthening its daily yuan guidance but at levels weaker than market expectations, suggesting it wants to manage the pace of appreciation.

UBS analysts said seasonal factors could come into play as September approaches, with typically strong autumn export flows potentially lending support to the offshore yuan.

However, the magnitude of any such appreciation would likely hinge on the PBOC midpoint fixing strategy, they said.

The yuan is up 0.6% against the dollar this month, and 3.7% firmer this year.

The offshore yuan traded at 6.745 per dollar, up about 0.01% in Asian trade.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was steady at 100.

The PBOC said on Wednesday that it would conduct up to 600 billion yuan ($88.98 billion) worth of overnight reverse repos per day on August 14 and August 17-19.

The central bank uses the short-term liquidity tool to fine-tune cash conditions in the country’s banking system.