SHANGHAI: China’s yuan breached the key threshold of 6.9 per dollar on Monday to end the domestic trading session at a two-year low, after the Federal Reserve chief signalled interest rates would be kept higher for longer to bring down soaring US inflation.

Fed Chair Jerome Powell’s hawkish remarks at Jackson Hole on Friday pressured the Chinese currency despite the central bank setting a firmer-than-expected midpoint fixing, which the market interpreted as an attempt to address the yuan’s recent weakness.

The yuan has lost more than 2.5% to the dollar so far this month and is on course for its biggest monthly drop since April, when strict COVID-19 lockdowns in various Chinese cities, including the financial hub of Shanghai, heightened concerns over growth in the world’s second-largest economy.

Prior to the market opening the People’s Bank of China had (PBOC) set the midpoint rate at 6.8698 per dollar, 212 pips or 0.31% softer than the previous fix of 6.8486 and the weakest since Aug. 28, 2020.

But Monday’s fixing came in much stronger than market expectations, 101 pips firmer than Reuters’ estimate of 6.8799.

Market participants have been closely monitoring the daily guidance for hints about the authorities’ position on the yuan. A firmer-than-expected fixing could mean they are getting increasingly uncomfortable with the currency’s decline.

But the fixing failed to stem the selling, with both the onshore and offshore yuan quickly breaching the psychologically critical 6.9 per dollar level.

The onshore yuan finished the domestic trading session at 6.9210 per dollar, the weakest such close since Aug. 20, 2020, versus the previous close of 6.8715.

If it retains all the losses at the late-night close, it would have fallen 0.72% to the dollar to book its worst day since May.