SHANGHAI: China’s yuan hovered near a three-month low against a firmer dollar on Thursday after minutes from the latest Federal Reserve policy meeting pointed to higher US interest rates to tame inflation.

The dollar held gains after Fed officials saw “little evidence” late last month that US inflation pressures were easing, the central bank’s July meeting minutes showed.

Fed monetary tightening could further lift the dollar and pressure other major currencies, as money would flow to dollar-denominated assets.

Such hawkishness could particularly hurt the yuan as the People’s Bank of China (PBOC) is set to take more easing steps, pressured by a shaky economy that is undercutting jobs. But it faces limited room to manoeuvre due to worries over rising inflation and capital flight, policy insiders and analysts said.

The onshore spot yuan opened at 6.7760 per dollar and was changing hands at 6.7863 at midday, 58 pips weaker than the previous late session close, not far from a three-month low of 6.7978 hit on Tuesday.

Prior to market opening, the PBOC set the midpoint rate at 6.7802 per dollar, 61 pips or 0.09% firmer than the previous fix 6.7863.

China’s yuan rebounds off 3-month low on policy support expectations

Currency traders and analysts said the yuan’s weakness in morning deals was also reflecting a possible escalation in Sino-US tensions over Taiwan after Washington and the island agreed to start trade talks under a new initiative.

“We see a risk of yuan depreciation possibly gathering momentum on a lethal combination of deteriorating macro backdrop and geopolitical tensions ahead of key political events such as the Party Congress and the US mid-term election,” analysts at Maybank said in a note.

Such concerns over regional geopolitical tensions and the PBOC’s dovish stance in light of this week’s surprise cuts to two key rates prompted some investment banks including Standard Chartered to revise down their yuan forecasts.

“Although we continue to see a stronger CNY before year-end on China-US growth divergence, a possibly weaker USD and a still-healthy trade surplus, the policy shift may curb the downside for USD/CNY in the near term,” said Becky Liu, head of China macro strategy at Standard Chartered.

Liu cut her forecast for the yuan to trade at 6.75 per dollar at end-Q3 from 6.65 previously, while maintaining year-end view of 6.6.

Markets also widely expect the country’s benchmark lending loan prime rate (LPR) to be lowered at the monthly fixing next Monday.

By midday, the global dollar index rose to 106.665 from the previous close of 106.574, while the offshore yuan was trading at 6.8015 per dollar.