China's yuan weakens to one-week low on strong dollar, Fed hike bets weigh

SHANGHAI: China’s yuan fell to a one-week low against the dollar on Thursday, reflecting broad greenback strength on mounting bets the Federal Reserve will hike interest rates later this year.

The US central bank held rates steady in a 3.50%-3.75% range as new chair Kevin Warsh opened his era with a sweeping policy review. New quarterly projections showed nine out of 19 Fed officials now anticipate a hike in rates by the end of 2026.

The Fed funds futures market has now priced in an 83% chance of Fed tightening in December, according to CME FedWatch, with a strong retail sales reading further adding to hawkish bets.

In reaction to the buoyant dollar, the onshore yuan weakened to a low of 6.7690 per dollar, the weakest level since June 11, before changing hands at 6.7625 as of 0310 GMT.

Its offshore counterpart last fetched 6.7642 per dollar.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.8130 per dollar, 378 pips weaker than a Reuters’ estimate of 6.7752. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

The central bank has been setting guidance at weaker-than-expected rates since November 2025, a move that investors widely interpret as an attempt to keep the market stable and prevent excess yuan gains.

 The gap between market projections and the official setting considerably narrowed on Thursday amid the dollar strength, traders and analysts said. On Wednesday, the official setting was 527 pips softer than Reuters’ forecast.

“The fix tends to narrow with the estimates when the dollar is moving higher and widen when dollar is falling - a sign that PBOC wants to slow the USD/CNY move lower,” Maybank analysts said in a note.

The weaker yuan was driven by the elevated dollar as well as a surprise drop in China’s retail sales in May, the first drop in more than three years, pointing to weak consumption, according to data released on Tuesday, they said.

“However, direction-wise, PBOC is comfortable with allowing the yuan to strengthen,” they said.

Separately, to promote the offshore yuan business in Shanghai, China’s central bank said on Wednesday that six top state banks had been authorised to conduct offshore yuan transactions in Shanghai’s free trade zone.

“The near-term impact on CNH spot is likely to be limited, given the tiny spread between CNY and CNH,” said Serena Zhou, senior China strategist at Mizuho Securities.

“However, this is a further step toward closer integration of the onshore and offshore yuan markets. Over time, it should give onshore banks a greater role in CNH pricing, while also enhancing the PBOC’s ability to monitor and guide offshore yuan market dynamics.”