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HONG KONG: The Chinese yuan rallied on Thursday to finish the domestic session at its strongest level in six weeks on broad dollar weakness after the U.S. Federal Reserve signalled it could cut rates as early as next month to bolster its economy.

The Fed's dovish remarks after its policy meeting on Wednesday reinforced market expectations it was ready to battle growing global and domestic economic risks with interest rate cuts as it considers the impact of rising trade tensions and growing concerns about weak inflation.

The news cheered Asian markets but pushed down U.S. dollar and Treasury yields. The global dollar index stood at 96.707 as of 0830 GMT, close to its one-week low and down more than 0.4% from the previous close of 97.117.

Broad dollar weakness helped send the onshore yuan to 6.8505 per dollar, its strongest domestic session close since May 10, and up almost 0.8% from the previous late close as of 0830 GMT. That would mark the currency's largest daily gain since December 3, 2018.

The offshore yuan tracked the rally, trading at 6.8554, up nearly 0.6% on the day. Both onshore and offshore yuan strengthened to 6.85 for the first time since mid-May.

A Hong Kong-based FX and fixed income trader noted that broader dollar weakness has lifted various asset classes across the region, with the yuan as one of its beneficiaries.

"Everything is rallying today. The market is getting out of short positions," he said. But the yuan could firm further, he added, noting that Chinese exporters would repatriate their proceeds once Beijing and Washington return to trade talks, reducing the risk of the currency breaking the psychological level of 7 per dollar.

"That is going to be added to renminbi demand, at the same time as offshore interest in Chinese stocks rises, with stronger bond market inflows," said the trader, who sees a 2%-3% yuan rally between now and the end of the month. An FX sales banker in Hong Kong also attributed Thursday's yuan strength to a softer dollar. "Flows in CNH have been very light today. The focus is predominantly on U.S. Dollar," he said.

But he reckoned the yuan rally could fizzle out after the G20 summit next week, where the Chinese and U.S. leaders will meet over their trade dispute. "My view is that the G20 won't yield a lot of result, confirmation of that could yield a bit of negative sentiment."

Carie Li, an economist at OCBC Wing Hang, also cautioned against chasing the yuan rally, pointing out that neither Fed policy direction nor trade talk outcomes are set in stone.

"We don't think the renminbi has escaped depreciation pressure yet," said the analyst, who said the yuan would face resistance at its 50-day moving average. That is currently at 6.8480 per dollar for the offshore yuan.

Chinese state media said on Thursday that trade talks between U.S. President Donald Trump and Chinese President Xi Jinping at the G20 Summit later this month are unlikely to immediately resolve major disagreements between the two sides but could start a new phase in negotiations.

U.S. Trade Representative Robert Lighthizer said on Wednesday he will confer with his Chinese counterpart in the Sino-U.S. trade talks, Vice Premier Liu He, before next week's meeting.

Copyright Reuters, 2019