China’s yuan steady after rally, Fed caution keeps dollar pressured

Chinese 100 yuan banknotes are seen in a counting machine while a clerk counts them at a branch of a commercial bank in Beijing

SHANGHAI (Reuters) – China’s yuan was steady against the dollar on Thursday after late-trade driven solid gains the previous day when the market had wagered the U.S. Federal Reserve would adopt a cautious stance toward raising interest rates.

Indeed, globally the greenback was on the defensive after the Fed lowered its economic growth forecasts and scaled back its rate hike projections, cementing expectations that it will have to skip tightening next month.

The spot yuan was little changed against the dollar at 6.5817 around midday, versus previous day’s close at 6.5786.

The Chinese currency jumped in late Wednesday trade from a five-year low of 6.6047 hit in early deals, as speculators rushed in to position for a more cautious Fed.

“The yuan had factored in the Fed’s latest stance,” said a dealer at a European bank in Shanghai, and so traders brushed aside a higher official fix.

The People’s Bank of China set the midpoint rate at 6.5739 per dollar prior to the market open, 0.4 percent firmer than the previous fix of 6.6001, which was the weakest official fix in more than five years.

Some traders said that Thursday’s higher midpoint was also in line with China’s recent reforms to allow increased two-way volatility in its currency as authorities gradually build up a more market-oriented exchange rate regime.

“More volatility in the yuan of late indicates that the authorities are serious about reforming the mechanisms to price the yuan’s exchange rate,” said Huang Yi, head of foreign exchange trading at China Guangfa Bank in Shanghai.

“The PBOC is therefore settling in to let the market have a bigger say in the yuan’s value, though progress is expected to be gradual.”

(Reporting by Lu Jianxin and Nathaniel Taplin; Editing by Shri Navaratnam)