SHANGHAI: China's yuan leapt to an eight-month high against a weakening dollar on Thursday after the U.S. Federal Reserve signalled an end to its three-year campaign to tighten monetary policy.
The Fed stunned markets overnight by abandoning all plans to raise interest rates this year while trimming its forecasts for U.S. economic growth.
The boost from dollar losses more than offset worrying news on the trade front.
U.S. President Donald Trump warned on Wednesday that the United States may leave tariffs on Chinese goods for a "substantial period" to ensure that Beijing complies with any trade agreement the two sides are trying to hash out. Face-to-face talks are due to resume next week.
The People's Bank of China (PBOC) on Thursday set its official yuan midpoint at 6.6850 per dollar, 251 pips, or 0.38 percent, firmer than the previous fix of 6.7101 and the strongest since July 17, 2018.
In the spot market, onshore yuan opened at 6.6799 per dollar and jumped to a high of 6.6689 at one point, the strongest level since July 13, 2018.
But it later pared gains as traders rushed to liquidate short positions in the greenback and lock in profits.
By midday, spot yuan was changing hands at 6.6839, 104 pips firmer than the previous late session close and 0.02 percent stronger than the midpoint.
Some corporate clients also loaded up cheaper dollars on Thursday morning, traders said.
Thursday's move brought the yuan's gains so far this year to 2.8 percent against the dollar, threatening to add pressure on China's struggling exporters. Market talk is slowly swinging to speculation over how much more appreciation authorities will be comfortable with.
"My feeling is that 6.6 per dollar could be the ceiling, as many market people still bet on depreciation in the yuan," said a second trader at a Chinese bank.
Zhang Yu, chief macro analyst at Huachuang Securities in Beijing, said Sino-U.S. trade negotiations and the dollar's movements are playing a bigger role affecting the yuan.
The yuan should benefit from a weaker dollar against the backdrop of rising economic pressure, a pause in interest rate hikes and falling yields in the United States, she said in a note on Thursday.
"As long as China and the United States are not completely confronting each other, the yuan is more likely to trade higher than lower," Zhang added. The offshore yuan was trading at 6.6847 per dollar.
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