SHANGHAI: China's yuan hovered at a more than 3-1/2-year high against the dollar on Tuesday, while its value against major trading partners jumped to strongest level since late 2015, underpinned by persistent corporate demand before the long holiday.
Currency traders said the yuan largely shrugged off the broad dollar strength in global markets against the backdrop of safe-haven demand due to worries over a faster pace of Federal Reserve policy tightening and potential military conflict in Ukraine.
Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.3418 per dollar, 7 pips weaker than the previous fix 6.3411. But it was 32 pips weaker than Reuters' estimate of 6.3386.
While most other non-dollar currencies booked losses against a rising greenback, yuan's strength sent its trade-weighted CFETS basket index to 103.21, the highest level since Nov. 18, 2015, Reuters calculation based on official data.
Ukraine tensions lift dollar, yuan holds firm
"Everyone was selling dollars (for yuan)," said a trader at a foreign bank.
The spot yuan opened at 6.3280 per dollar and was changing hands at 6.3296 at midday, 8 pips firmer than the previous late session close. The spot price hit a high of 6.3238 in late trade on Monday, the loftiest level since May 2018.
FX conversion before the week-long Lunar New Year holiday, which starts on Jan. 31, has been traditionally heavier as exporters need to settle their dollar receipts for goods payments and employee bonuses, but markets widely expect some weakness could kick in soon.
"Corporate's FX settlement could weaken in light of slowing export growth in the next few months to drag the yuan lower," said Marco Sun, chief financial markets analysts at MUFG Bank.
But Sun noted investors can't rule out more intensified policy stimulus than the market has expected to offer support for sentiment and the currency prices.
"Barring unexpectedly lethal (COVID-19) variants, demand recovery may be broaden in the rest of the world especially within Asia where vaccination rates have caught up. In such an environment, we are more negative on the CNY on a trade weighted basis," analysts at Maybank said in a note.
Still, several traders said markets would likely wait till mid-March after Beijing holds the Winter Olympic Games and the annual parliamentary gathering as the authorities are usually keen to preserving financial markets stability during key events.
By midday, the global dollar index rose to 95.966 from the previous close of 95.918, while the offshore yuan was trading at 6.3359 per dollar.