SHANGHAI: China’s yuan eased against the dollar on Wednesday, pressured by market worries over increasingly divergent monetary policy stances between China and other major economies.

The European Central Bank is scheduled to meet on Thursday and markets expect it to confirm an end to bond buying this month.

Its US counterpart is widely expected to raise its benchmark funds rate by 50 basis points next week and again in July.

Meanwhile, in China, investors believe a mid-year liquidity injection is still needed to underpin the country’s slowing economy.

“The package of monetary and financial policies in 2022 focused on providing relief to market entities …. Apart from blanket cuts to the reserve requirement ratio (RRR) and interest rates, structural monetary policies (were) also featured prominently,” analysts at CICC said in a note.

Before the market opening, the People’s Bank of China (PBOC) set the yuan’s midpoint rate at 6.6634 per dollar, 15 pips firmer than the previous fix, 6.6649.

In the spot market, onshore yuan opened at 6.6670 per dollar and was changing hands at 6.6740 at midday, 28 pips weaker than the previous late session close.

“Markets will closely monitor the tightening trajectory by the ECB,” said a trader at a Chinese bank.

Monetary divergence should pile some downside pressure on the yuan and increase risks of capital outflow.

A second trader at a Chinese bank said the authorities might be willing to allow some yuan weakness to support the export sector, which served as a key driving force of the economy during the pandemic.

Yuan eases from month high, investors focus on economic recovery

China will adopt targeted measures to lower costs, improve supply chains and help firms engaged in foreign trade, Vice Commerce Minister Wang Shouwen told a press conference on Wednesday.

Separately, markets were also anxiously gauging potential impact on the currency after several US officials indicated a lowering of Trump-era tariffs on Chinese goods.

“Overall, announcements of tariff relief, if any, are likely to lead to a stronger renminbi, with the precise magnitude depending on the scope of the tariff reduction,” analysts at Goldman Sachs said in a note.

“However, looking beyond the day of announcement, other drivers such as the direction of the broader USD and China’s growth outlook may be more important to the movements in CNY than tariffs.”

US President Joe Biden has said he is considering removing some tariffs on Chinese goods.

His administration is seeking ways to cool inflation, and industry groups have called for tariff cuts to reduce costs for businesses and consumers.

By midday, the global dollar index rose to 102.563 from the previous close of 102.318, while the offshore yuan was trading at 6.6776 per dollar.