SHANGHAI: China’s yuan strengthened against the dollar on Wednesday, as economic improvement supported market sentiment, while investors await the Federal Reserve’s policy meeting, which could deliver the largest interest rate hike in three decades.

The world’s second-largest economy showed signs of recovery in May as industrial production rose unexpectedly, data showed, but consumption was still weak and underlined the challenge for policymakers amid the persistent drag from strict COVID curbs.

“Overall, the encouraging figures suggested that the worst is behind after the lockdowns, paving the way for the revision of bearish China growth outlook this year,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Prior to market opening, the People’s Bank of China (PBOC) set the midpoint rate at a fresh one-month low of 6.7518 per dollar, 36 pips weaker than the previous fix 6.7482.

China’s yuan slips to two-week low

In the spot market, the onshore yuan opened at 6.7270 per dollar and was changing hands at 6.7194 at midday, 231 pips firmer than the previous late session close.

Currency traders said market attention has switched to the Fed decision due later in the session as the pace of the monetary tightening in the United States could affect global fund flows and major currencies.

Markets widely expect the Fed to hike interest rates by 75 basis points, more than previously forecast.

Some traders and analysts believe a likely Fed tightening had stopped the PBOC from lowering its medium-term policy rate on Wednesday, to prevent further policy divergence with the United States, which would weigh on the local currency.

“Given recent sharp rises in the interest rates abroad, we now think that the PBOC may not formally lower rates anymore this economic cycle,” said Sheane Yue, China economist at Capital Economics.

By midday, the global dollar index fell to 105.208 from the previous close of 105.518, while the offshore yuan was trading at 6.7289 per dollar.