The Chinese yuan weakened to a five-month low against the dollar on Friday amidst rising tensions in the Middle East, which sparked a rally for safe-haven assets like the U.S. dollar and gold, and jeopardized emerging market currencies.
The onshore yuan opened at 7.2391 per dollar and declined to a low of 7.2431, its softest since November 17, 2023. By midday, the yuan was exchanging at 7.2426, and by 10:09 GMT, it eased back to 7.2411.
Despite the Chinese yuan’s depreciation, some currency traders noted that its losses were relatively contained. This moderation was due, in part, to reassurances from senior central bank officials regarding China’s commitment to maintaining exchange rate stability. The People’s Bank of China (PBOC) reiterated its goal of keeping the yuan exchange rate essentially stable, signaling a measured approach to managing currency fluctuations.
Read: Japanese yen plunges to 34-year low amid dovish BoJ outlook
Yuan’s midpoint rate
China’s central bank took proactive steps to address yuan weakness, setting the midpoint rate slightly weaker than the previous fix at 7.1046 per dollar, around which the yuan can trade in a 2 percent band. This official guidance is the weakest since March 1 but is still much stronger than market expectations, marking it as an official attempt to control yuan weakness.
This stronger-than-expected yuan midpoint fixing has propelled the yuan’s basket value to a new 18-month high.
Hence, the central bank’s daily benchmark fixings and support from state-owned banks have slowed the decline of the Chinese yuan, which witnessed a 1.9 percent decline so far this year. However, the central bank faces challenges as the yuan nears the 2 percent trading band in the stock market. Moreover, analysts explained that maintaining this fixed rate while the U.S. dollar appreciates could lead to a passive appreciation of the Chinese yuan which was evident last week.
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