China's yuan hovers near two-week low as hawkish Fed bets lift dollar

SHANGHAI: The yuan hovered near a two-week low against the dollar on Tuesday, reacting to broad greenback strength underpinned by rising investor bets on a more hawkish Federal Reserve and a weaker midpoint fixing guided by the Chinese central bank.

The dollar strengthened as US Treasury yields climbed with interest-rate-sensitive 2-year yields touching a 16-month high, as traders positioned for the prospect of Fed rate hikes later this year.

Pressured by the buoyant dollar, the onshore yuan eased to 6.7779 per dollar at 0300 GMT, not far from a near two-week low of 6.7793 hit a day earlier.

Its offshore counterpart last fetched 6.7797 per dollar.

Before the market opened, the People’s Bank of China set the midpoint rate at 6.8171 per dollar, the weakest fixing since June 8. The spot yuan is allowed to trade 2% on either side of the fixed midpoint each day.

“In the near term, we will closely monitor the central bank’s midpoint guidance and remain vigilant to seasonal FX demand linked to dividend payments, which could offset the yuan’s short-term upward momentum,” analysts at Ping An Bank said in a note, expecting the yuan to trade in a range of 6.75 to 6.8 per dollar this week.

Hong Kong-listed Chinese companies typically have to make dividend payouts to their overseas shareholders between May and August every year and such seasonal FX demand should put some downside pressure on the yuan.

 For this year, the peak dividend season is likely to fall in June, with an estimated $24 billion in FX demand to be met. And roughly $60 billion worth of FX conversion will be made between June and August, according to regulatory filings data, Reuters calculations and analyst estimates.

Among the largest payouts, China Construction Bank will lead with a dividend of $7.144 billion, scheduled for August 21. And China Mobile ranks second with a $6.677 billion dividend set for June 24.

Based on Tuesday’s midpoint fixing, the yuan’s trade-weighted value against its major trading partners, as measured by the CFETS yuan basket index, rose to 102.32, the loftiest level since September 14, 2022, up 4.4% year-to-date, according to Reuters calculations that are based on official data.

Meanwhile, the yuan has strengthened about 3.1% so far this year on the back of strong exports and a robust trade surplus.

“The Fed’s hawkish shift and the subsequent dollar rally enabled the yuan to outperform most of its emerging market peers,” said Roman Ziruk, senior market analyst at Ebury, a global financial services firm and FX specialist.

Currency traders said they will pay close attention to US data later this week, including the May PCE price index due on Thursday - the Fed’s key inflation gauge - which could offer more clues to the US central bank’s monetary policy outlook.