(Bloomberg) — China’s central bank stepped in to stabilize the yuan with its daily reference rate, after the currency dropped to a two-month low in response to the dollar’s surge.
The People’s Bank of China set the yuan’s reference rate around 7.15 per dollar on Thursday, diverging from analyst estimates by the most since late April. The move signals a show of support for the currency which fell after the dollar rallied to its strongest level in two months.
The central bank is renewing its support for the currency as the dollar’s rise gains momentum following trade deals favoring the US and as the Federal Reserve signals patience on rate cuts. The PBOC had largely refrained from boosting the yuan in May and June as the currency was on a rising trajectory.
The fixing “will help to limit yuan weakness today,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group. “Authorities do not want too much volatility in the currency” and are opting to cap the fix around 7.15 despite the strong dollar rally.
The offshore yuan gained 0.2% to 7.1991 per dollar on Thursday, after falling as low as 7.2146 Wednesday, the weakest since early June. The yuan, along with the Singapore dollar, remained resilient on Thursday, while other regional peers fell under the weight of the greenback’s overnight gains.
The recent revival of the greenback, which has already triggered hedge funds to unwind short dollar bets, is set to test the confidence of yuan bulls. A few Wall Street names including Morgan Stanley, UBS Global Wealth Management and Deutsche Bank AG had forecast the yuan would climb 7.1 or lower in their research notes this month.
Angst over US tariffs has added to the dollar’s strength and dragged down currencies including the euro and Indian rupee. That’s before Bloomberg’s dollar gauge jumped on Wednesday as Fed Chair Jerome Powell said that there is no decision on a September move and traders dialed back bets on rate cuts this year.
Markets were caught wrong-footed on the dollar when Powell sounded more hawkish than expected, said Fiona Lim, a senior strategist at Malayan Banking Bhd.
“The PBOC is using the fix to stabilize the yuan, keeping to its stance of ensuring currency stability, whilst still allowing the broader market forces to determine its direction”
–With assistance from Ran Li.
(Updates with additional context on dollar strength in 7th paragraph.)
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