The yuan headed for a third week of declines, the longest stretch of losses since December last year, as the US dollar strengthened amid speculation the US Federal Reserve will raise interest rates as early as next month.
The Chinese currency fell 0.2 percent this week to 6.5440 a dollar as of 9:56am in Shanghai, according to China Foreign Exchange Trade System prices. The Bloomberg Dollar Spot Index was poised for a third week of gains after minutes of the Fed’s meeting last month showed most officials want to raise borrowing costs next month should the US economy continue to improve.
A resurgent greenback is testing the People’s Bank of China’s (PBOC) tolerance for a weaker currency as the monetary authority said it is trying to maintain the yuan’s stability against a basket of currencies. Speculation that the dollar could advance further on a rate increase widened the gap between the yuan’s onshore and offshore exchange rates to a three-month high.
“As the Fed minutes showed the possibility of an interest-rate increase in June is rising, the yuan inevitably came under pressure as other currencies declined,” Hong Kong-based Bank of East Asia Ltd (東亞銀行) currency analyst Kenix Lai (賴春梅) said. “If the US does raise interest rates in June, China’s capital outflows could worsen. The PBOC could again intervene should depreciation become too fast, and the rate gap onshore and offshore rises above 500 pips.”
The yuan gained 0.1 percent in Shanghai on Friday, with the gap against the offshore rate narrowing to 163 pips after touching a three-month high of 386 on Wednesday. The one-month implied volatility on the onshore yuan, a gauge of expected price swings, rose as much as 23 basis points to a six-week high of 5.04 percent on Thursday, according to data compiled by Bloomberg.
A Bloomberg replica of the CFETS RMB Index, which the central bank uses to track the yuan against 13 currencies, rose 0.1 percent to 97.35 on Friday and headed for the biggest weekly increase since January.
The US dollar fell against the New Taiwan dollar on Friday, shedding NT$0.050 to close at NT$32.752, up from NT$32.626 on Friday last week, as traders locked in gains posted in recent sessions, pushing down the US unit, dealers said.
The selling in the US dollar also reflected the strength of other regional currencies, while the losses were capped by lingering concerns over a possible interest rate hike by the Fed, dealers said.
The greenback opened at NT$32.73 on Friday, and moved between NT$32.72 and NT$32.798 before the close. Turnover totaled US$730 million during the trading session.
The US dollar opened lower against the NT dollar as traders pocketed gains posted in the past two sessions, and selling continued in the wake of the strength enjoyed by other regional currencies, the dealers said.
The won snapped a two-day drop, rising 0.4 percent, as the ringgit added 0.1 percent.
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