Close-up of RMB banknotes, with Mao Zedong
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Chinese Yuan The dollar index rose to its highest level in nearly 16 months on Friday on bets that Beijing will launch new economic stimulus measures following a sharp cut in U.S. interest rates, although dollar buying by China’s state-owned banks capped gains.
The onshore RMB exchange rate rose to 7.0420 against the US dollar, the highest level since May 24, 2023, and is expected to rise for six consecutive trading days.
While China kept its benchmark lending rate steady on Friday, confounding expectations of a rate cut, market watchers believe more support measures will soon be rolled out to prop up China’s struggling economy, with the Federal Reserve’s easing policy providing an opportunity for Beijing to ease leeway without causing undue harm to the yuan.
The yuan has gained about 3% since late July, recouping losses suffered in the first half of the year. Dollar plunged on expectations of a U.S. interest rate cut. The Federal Reserve cut interest rates on Wednesday by a larger margin than usual, by 50 basis points.
“I still expect the central bank to cut interest rates in the coming months as this is a necessary measure to deal with deflationary pressure on the economy,” said Zhang Zhiwei, chief economist at Pindian Asset Management.
Lower interest rates in China could put pressure on the yuan, but many believe Beijing’s rate cuts will be milder than those in the U.S., and if Beijing launches larger stimulus measures, the negative impact will be offset by a potentially stronger economy. .
The trend is likely to accelerate as more exporters settle foreign exchange earnings and signs of increased corporate demand have also boosted the yuan.
China’s main state-owned banks bought dollars in the onshore market on Friday to prevent the yuan from appreciating too quickly.
Yang Fan, chief macro analyst at CITIC Securities, said in the report, “The concentration of exporters settling in US dollars may increase foreign exchange fluctuations and push the RMB/USD exchange rate closer to 7.0.”
However, she said that the RMB is unlikely to appreciate above 7.0 because the People’s Bank of China wants to maintain the stability of the RMB and does not want to see the RMB overshoot in either direction.
Before the market opened, the People’s Bank of China set the central parity rate against the U.S. dollar at 7.0644, the highest level in the past 16 months.
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