China's yuan climbs to fresh 4-year high, global central bank meetings in focus

China's yuan has surged to a four-year high against the dollar, driven by a weakening greenback and growing concerns about inflation. Investors are now watching a series of important central bank meetings next week, where the Federal Reserve, Bank of Japan, and European Central Bank are expected to keep interest rates steady but maintain a more cautious tone.

The People's Bank of China set the midpoint yuan rate at 6.7195 per dollar before markets opened. However, the spot yuan traded 2% above and below this midpoint daily. Thursday's midpoint was 439 pips below a Reuters forecast, the widest deviation since September. The central bank has been cautiously strengthening the yuan's daily guidance, but at a slower pace than markets anticipated, indicating efforts to manage the currency's appreciation.

Despite the PBOC's efforts, the spot market saw the yuan reach a high of 6.6740 per dollar, the strongest level since June 2022, before settling at 6.6749 as of 0238 GMT. The offshore yuan also strengthened to 6.6744 per dollar, up slightly in Asian trade. Trading was relatively thin, with spot prices fluctuating in a narrow 20-pip range and volume dropping to around $10.6 billion.

Analysts attribute the yuan's strength to robust exports and consistent foreign-exchange settlements. With the yield gap between China and the US near its widest on record, traders are closely monitoring US interest rate moves for clues about the direction of the Chinese currency. Currently, there's a slim chance of a Federal Reserve rate hike next week, with the next increase likely in December.

If export performance and foreign-exchange settlements continue, the yuan could maintain stability or even appreciate further, while the US dollar index remains resilient, according to analysts at China Merchants Bank.