Yuan slips from one-month high as Gulf risks lift dollar

HONG KONG: China’s yuan weakened against the US dollar on Friday, slipping from a one-month high as Gulf tensions continued to buoy safe-haven flows into the greenback.

The yuan was 0.06% lower at 6.7752 to the dollar, its second down day to further pull back from its one-month high reached on Wednesday.

The offshore yuan traded at 6.7769 yuan per dollar, down about 0.04% in Asian trade.

Escalating attacks between the US and Iran dented sentiment, pushing the dollar higher while pressuring the yuan. Iran said it launched fresh attacks on US facilities in the Gulf on Friday after a sixth consecutive night of US strikes on Iranian military facilities.

 Still, the yuan is on track for its third straight week of gains, with the dollar heading towards a weekly drop after softer-than-expected US inflation reports this week led traders to cut bets on imminent rate hikes from the Federal Reserve.

 “Directionally, broad RMB strength remains intact due to structural factors,” analysts at HSBC said in a note, citing yuan internationalisation, China’s productivity growth and trade relations.

 But the pace of appreciation can slow due to cyclical challenges, such as the divergence in data surprises and widening US-China rate differentials, they added.

 Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.7934 per dollar, off from more than three-year highs reached on Thursday, and 200 pips weaker than a Reuters’ estimate.

 The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

 The fixing level has consistently made new lows in the last couple of weeks, suggesting policymakers are now more comfortable with such an appreciation path, analysts said.

 “The consistent downtrend in the fixing observed since mid last year signals authorities’ preference for a moderately stronger RMB, we think, while simultaneously encouraging exporters to maintain USD settlement flows,” analysts at BNP Paribas said.

 The robust growth in trade and rising FX deposits suggest that these USD settlement flows will remain the primary driver of yuan strength this year, they added.

Elsewhere, China’s foreign exchange regulator said on Friday that it is currently allocating fresh quota under the Qualified Domestic Institutional Investor (QDII) scheme.

 The QDII scheme allows qualified domestic investors to invest in overseas equity and bond markets, making it one of the key channels for outbound portfolio flows.