The Chinese yuan surged past the significant milestone of 7 per dollar for the first time in 16 months, as investors responded to a series of initiatives aimed at bolstering the Chinese economy. This rally was further aided by a recent cut in the Federal Reserve’s interest rates, which put the U.S. dollar under pressure. On Wednesday, the offshore yuan reached a peak of 6.9951 against the dollar, marking a notable 4% rebound from a low seen earlier this year in July.
In response to concerns regarding its economic growth targets, China unveiled an array of policy measures on Tuesday, including the establishment of a stock stabilization fund. The yuan’s strengthening this quarter aligns with market anticipations that the Federal Reserve may adopt a more accommodative stance, following its recent half-percentage point rate cut, which has kept the dollar at its lowest value since January.
Analysts believe that yuan gains may continue, especially if the weakness of the dollar encourages Chinese exporters to convert some of their substantial dollar reserves back into yuan. Notably, there has been an uptick in capital inflows into China as local firms reported net sales of foreign exchange at banks for the first time in 14 months in August.
The People’s Bank of China’s (PBOC) approach towards the yuan has gained attention as market sentiment shifted from pessimism to optimism, reflected in the currency’s swift appreciation. Although the recent measures announced on Tuesday have fostered a more positive outlook in China, authorities remain vigilant against excessive gains that could adversely affect the competitiveness of the nation’s exports.
On Wednesday, the PBOC’s yuan reference rate indicated a balanced stance, setting the fixing at 7.0202 per dollar, closely aligning with the Bloomberg survey estimate of 7.0206.
Khoon Goh, head of Asia research at Australia & New Zealand Banking Group, commented, “The authorities are not seeking to push back against the recent yuan appreciation.” He added that they appear to be “giving the green light for further currency gains.”
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