China's yuan gains as Fed rate caution knocks dollar from 18-month high

SHANGHAI: China's yuan saw a slight increase against the US dollar on Thursday as Federal Reserve officials expressed doubts about raising interest rates this month, despite more robust-than-expected inflation data. The onshore yuan rose by 0.09% to 6.6918 per dollar in the spot market by 3:07 AM GMT, while the offshore counterpart traded at 6.6921.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.7253 per dollar, significantly weaker than the 6.6977 estimated by Reuters. The spot yuan is permitted to trade within a 2% range of the fixed midpoint each day. Based on this fixed midpoint guidance, the yuan's trade-weighted value against its major trading partners reached a four-year high of 103.73, according to Reuters calculations based on official data.

The Chinese currency has gained approximately 5.9% so far this year against its major trading partners, compared to a 4.5% increase against the dollar. Analysts at Pantheon Macroeconomics anticipate gradual yuan appreciation throughout 2026 and into 2027, with occasional fluctuations to deter speculative inflows. They attribute this to strong exports, particularly from high-tech industries, giving policymakers confidence that a modest appreciation is feasible.

Robust Chinese economic data, including trade and credit lending, bolstered market sentiment on Thursday. However, the focus will soon shift to Monday's release of third-quarter gross domestic product (GDP) data. Economists predict that China will likely achieve its 4.5%-5.0% GDP growth target for the year. To reach the lower end of this target range, growth of only 4.3% in the second half of 2026 would suffice.

Policymakers are expected to maintain only incremental easing measures through the remainder of 2026, according to Michelle Lam, Greater China economist at Societe Generale.