China yuan nears 3-1/2-year high as Fed rate hike bets fade

China's yuan neared a three-and-a-half-year high against the dollar on Friday, marking its seventh consecutive weekly gain. The surge was driven by a stronger midpoint fixing and fading expectations for a Federal Reserve rate hike in September. The spot yuan increased by 0.01% to 6.7443 per dollar at 0258 GMT, fluctuating between 6.7420 and 6.7483 throughout the day.

This marked the currency's strongest level since February 2023. The People's Bank of China set the midpoint rate at 6.7878 per dollar before the market opened, 465 pips lower than a Reuters estimate. Analysts suggest that despite a slowdown in Chinese growth in the second quarter, the PBOC has maintained its guidance for a weaker USD/CNY rate, reinforcing the Chinese yuan's strength.

Meanwhile, the U.S. producer prices remained unchanged in July, suggesting the Fed may maintain current interest rates, which would benefit emerging-market currencies like the yuan. The yuan has gained 0.6% against the dollar this month and 3.7% so far this year.