China's yuan inches higher as midpoint rate firmer despite US rate hike

Hong Kong - China's yuan experienced a slight increase against the US dollar on Thursday, as the central bank raised the midpoint fixing to a three-and-a-half-month high, despite a rise in the greenback following the Federal Reserve's interest rate hike. The dollar held steady at a seven-week peak after the Fed raised rates by a quarter and hinted at more hikes in the future.

The People's Bank of China initially set the midpoint rate at 6.7580 per dollar, which was 339 pips lower than a Reuters estimate, before the market opened. Analyst Kimmy Tong suggested the central bank employs a "counter-cyclical adjustment" to reduce volatility and demonstrate a preference for currency stability. The spot yuan rose slightly by 0.03% to 6.7083 per dollar as of 03:49 GMT, trading within a range of 6.7082 to 6.7128.

Some analysts believe the US rate hike had already been priced into the market, while the yuan's appreciation is driven by factors like strong corporate foreign exchange settlement and a weak US dollar. Over the past month, the yuan has gained 0.2% against the dollar and 4.2% this year, reaching a multi-year high of 6.70, driven by robust exports and a weaker dollar.

Strategist Kevin Liu expects the yuan's appreciation to remain modest this year due to weak domestic demand. The offshore yuan also rose by about 0.06% in Asian trade, trading at 6.7086 yuan per dollar. Meanwhile, Hong Kong's Hong Kong Monetary Authority raised interest rates for the first time since July 2023, in line with the US hike.