Yuan weakens to near 7/dlr on virus concerns, policy easing expectations

• The trade dispute between Beijing and Washington was one of main pressure points for the yuan last year.
• The global dollar index rose to 99.166 at midday from the previous close of 99.003.
• The number of new coronavirus infections in mainland China fell below 2,000 on Tuesday for the first time since January.

SHANGHAI: China's yuan declined on Tuesday to near the key 7-per-dollar level as concerns over the economic impact from a fast-spreading coronaviurs outbreak and expectations for further monetary easing steps heaped pressure on the local currency.

The number of new coronavirus infections in mainland China fell below 2,000 on Tuesday for the first time since January, although global experts warn it is still too early to say the outbreak is being contained.

Prior to market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 6.9826 per dollar, 31 pips or 0.04pc weaker than the previous fix of 6.9795.

In the spot market, onshore yuan opened at 6.9831 per dollar and was changing hands at 6.9953 at midday, 140 pips softer than the previous late session close.

Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said market concerns over the negative impact of the coronavirus outbreak were intensifying.

"It appears that Chinese leaders are well aware of the downside risks for the economy under the strict disease control measures," he said in a note.

Similarly, Lu Ting, chief China economist from Nomura in Hong Kong also expects the epidemic to hit the world's second largest economy hard. He is forecasting first quarter economic growth to ease to 3.0pc on year, down from 6.0pc in the fourth quarter of 2019.

In order to limit the impact from the virus outbreak on the broad economy, China's central bank lowered borrowing costs for medium-term loans on Monday, paving the way for a reduction to the lending benchmark rate on Thursday.

Authorities are likely to respond with more monetary stimulus soon, a positive for domestic demand but not for the currency in the short term, said a trader at a Chinese bank.

Separately, some market participants pointed out that a potential flare-up in the Sino-U.S. tensions could drag on the yuan again.

Reuters reported that the Trump administration was considering changing U.S. regulations to allow it to block shipments of chips to Huawei Technologies from companies such as Taiwan's TSMC, the world's largest contract chipmaker.

The trade dispute between Beijing and Washington was one of main pressure points for the yuan last year.

The global dollar index rose to 99.166 at midday from the previous close of 99.003.

The offshore yuan was trading at 6.9967 per dollar as of midday.