SHANGHAI, Sept 28: The yuan rose against the dollar on Friday, heading for its biggest monthly gain this year in response to global dollar weakness driven by the third round of U.S. Quantitative easing that has sparked interest in riskier assets such as currencies in emerging markets, traders said.
The Chinese currency has now regained all the ground it lost earlier in the year, and hit a five-month high after the People’s Bank of China (PBOC) set a slightly stronger yuan midpoint to reflect a weakening in the dollar index.
But traders believe the central bank may act to cool renewed zeal for the yuan and could even intervene in trading to control the pace of its appreciation if the currency rises too sharply amid a sharp slowdown of China’s exports, traders said.
‘QE3-driven risk interest continues fermenting,’ said a trader at a European bank in Shanghai, referring to the latest bout of bond buying by the U.S. Federal Reserve.
‘But we don’t believe the yuan has much room to appreciate, as the authorities need a relatively stable currency to prevent a further slowdown in China’s exports.’
Spot yuan was trading at 6.2940 versus the dollar at midday, up from Thursday’s close of 6.3025, after hitting an intraday high of 6.2934, its strongest since April 17.
Before trading began, the PBOC set the yuan’s midpoint at 6.3410, slightly stronger than Thursday’s 6.3459.
A dollar strengthening that lasted for three months from late April had pushed the yuan to depreciate as much as 1.6 percent this year by late July, but the Chinese currency has since recovered all its lost territory compared with its closing level of 6.2940 at the end of last year.
VIGILANT
Until the fourth quarter of last year, when China’s slowing economy began sapping the yuan’s appreciation momentum, the PBOC had constantly intervened in trading to prevent the yuan from rising too sharply or too rapidly since the currency’s landmark revaluation in July 2005.
Now that QE3 appears to have driven the yuan back onto an appreciation track, the central bank could be vigilant against the renewed threat of an ever-rising yuan to the country’s exports, traders said.
‘We must closely monitor the impact of recent, new European and American bailout and stimulus steps,’ the central bank said in its latest policy statement published earlier this week.
China’s exports grew at a slower pace than forecast in August, while imports surprisingly fell, underlining the mounting challenge facing Beijing’s policymakers as domestic demand flags while the global economic outlook darkens.
Exports grew 2.7 percent year-on-year last month, below the 3 percent forecast in a Reuters poll and much slower than an official target of an increase of 10 percent for all this year.
The government will announce September and third-quarter economic data shortly after a week-long holiday next week for China’s mid-Autumn Festival and National Day, and the market widely expects the data to show continued weakness in the world’s second-largest economy, traders said.
Bullish bets on the Chinese yuan rose to its highest level in five months over the last two weeks, even as investors slashed long positions in most emerging Asian currencies, a Reuters poll showed on Thursday.
Positive bets on the yuan increased to their highest level since late April, as investors reduced bearish calls on the currency before a week-long Chinese holiday next week, sending it to a five-month peak versus the greenback.
(agencies)
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