Offshore yuan hits record low; dollar near 9-month high

China’s yuan hit its lowest since offshore trading was introduced in 2010 on Tuesday as the dollar remained strong across the board, trading near a nine-month high on expectations for a US interest rate hike by year-end.

The Chinese currency’s fall of more than 1.5 per cent since the end of September has prompted renewed suspicion among some in the market of a possible extended slide in the Chinese currency. It traded as weakly as 6.7882 yuan per dollar on Tuesday.

Officials, however, have reiterated their expectations for a stable currency.

Currency devaluation

The currency’s weakness has revived memories of China’s surprise devaluation last August and another rapid depreciation early this year - falls that spread turmoil in global financial markets, as investors fretted about deepening economic woes as growth slipped to a quarter-century low.

But analysts pointed out that during this round of yuan weakness, global risk sentiment was holding up.

“That highlights the extent to which dollar gains are unlikely to be as extended as they were (in the past),” said BNP Paribas currency strategist Sam Lynton-Brown, in London.

“As the dollar pushes higher against the yuan, which has a large weighting in the Fed’s exchange rate, it means the Fed is going to be more likely to rein in some of its more hawkish rhetoric, because of the strong dollar, negative risk feedback loop,” he added.

Dollar at 9-month high

The dollar was close to a nine-month high against a basket of currencies, having already risen 3.6 per cent so far this month, as solid US manufacturing activity and comments from a Federal Reserve official cemented US rate hike bets.

“Strong US manufacturing data boosted US bond yields and supported the dollar,” said Shinichiro Kadota, senior strategist at Barclays Securities in Tokyo.

Evans’ comments

Adding to the positive backdrop, Chicago Fed President Charles Evans had said on Monday the Fed could raise rates three times between now and the end of 2017, so long as inflation expectations and the labour market continue to improve.

Evans’ comments built on similarly hawkish remarks from Fed rate-setters in recent weeks.

As the dollar held firm, the euro eased 0.1 per cent to $1.0876, languishing near its seven-month low of $1.0859 touched on Friday.

The euro has come under renewed pressure after the European Central Bank had last week kept the door open to more stimulus in December and doused speculation that it would taper its asset buying programme.

The dollar also had an edge against the yen, rising 0.3 percent to a 12-day high of 104.495 yen, just below a 2-1/2-month high of 104.635 yen set earlier this month.

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