Yuan holds near 3-1/2-year peak as central bank slows gains

HONG KONG: China’s yuan held near a 3-1/2-year peak against the dollar on Tuesday, as the central bank continued to slow the pace of appreciation after two months of gains.

The central bank has been gradually setting its daily guidance at levels increasingly weaker than market expectations, a signal that the authorities want to cap further gains after a 4% year-to-date rally, market participants said.

 The yuan strengthened to as much as 6.7192 per dollar in morning trade, only 4 pips away from the strongest level since February 2023 of 6.7188 hit last week. It was last 0.02% down at 6.7210.

 The offshore yuan traded at 6.721 yuan per dollar, down about 0.05% in Asian trade.

 Prior to the market opening, the People’s Bank of China set the midpoint rate at 6.7809 per dollar.

That was the firmest in nearly two weeks but around 640 pips weaker than a Reuters estimate and close to the record deviation on the weak side that was logged in February this year.

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

Market participants said China was slowing the yuan’s appreciation path and was likely to keep further gains to a minimum this year as authorities step in to support exporters.

With consumers reluctant to spend and the property sector still mired in a years-long downturn, China’s growth has become increasingly dependent on factories and foreign demand.

However, while strong exports have helped offset weakness at home, the shift has heightened concerns among trading partners that excess Chinese production is being pushed onto overseas markets.

US Treasury Secretary Scott Bessent said on Sunday he will encourage G20 members to re-examine terms of trade with China to shrink global imbalances and press Beijing to rebalance its economy away from exports and toward domestic consumption.

 “Historically, ahead of meetings between Chinese and US leaders, the US often ramps up sanctions to gain more political leverage,” analysts at CMB International wrote in a note.

 “The yuan could come under some near-term pressure,” they said, adding that volatility is likely to persist ahead of the US nonfarm payrolls report this Friday.

The dollar index, which measures its value against six currencies, was subdued at 99.37, backing away from Friday’s gains as investors weighed rising odds of a rate hike from the Federal Reserve in September after last week’s hawkish remarks from Chair Kevin Warsh.