China's yuan firms to near 3-1/2-year-high on exports, inflation data

China's yuan experienced a notable surge against the US dollar on Wednesday, reaching a 3-1/2-year peak level, according to recent market reports. This gain was largely driven by positive inflation figures and increased export activity, both of which signaled a stronger economy. The softer dollar, buoyed by a rising yen, compounded the yuan's ascent.

By 0302 GMT, the spot yuan was trading at 6.7076 to the dollar, up 0.04% from the previous session, and hovered in a narrow range of 6.7074 to 6.7099. This price point was close to the peak of 6.7050 per dollar recorded on Monday, marking the strongest level since February 2023. Inflation data from China's August producer price index showed a robust increase of 3.8% from a year ago, outpacing the anticipated 3.6% rise and surpassing market expectations.

The consumer price index (CPI) also increased by 0.8% year-on-year, a notable improvement from the 0.5% rise seen in July. This positive economic outlook was reinforced by strong export figures released the day prior, with China's August exports surging 25% year-on-year. Much of this export growth was attributed to high-tech and AI-related markets.

The People's Bank of China set the midpoint rate at 6.7769 per dollar prior to market opening, representing the strongest midpoint rate in over three years. This rate was 727 pips lower than a Reuters estimate, the largest deviation since February 27 of this year. Despite these favorable indicators, analysts noted that domestic demand in China remains subdued, potentially tempering the yuan's appreciation.

Traders are also closely watching upcoming US inflation data to gauge the Federal Reserve's future interest rate policies. Offshore yuan was trading at 6.7052 per dollar, marking a modest increase of about 0.03% in Asian markets. The dollar index, which tracks six major currencies, stood at 98.77.