China's yuan eases to 7-month low on weak fixing, hawkish Fed

The yuan weakens against the dollar due to central bank guidance and speculation on USDCNY pair. Federal Reserve's hawkish stance delays interest rate cuts. Foreign investors avoid China's struggling stock market, impacting the offshore yuan. The dollar maintains stability against major currencies supported by positive U.S. housing market data.

's weakened to a fresh seven-month low against a broadly stronger on Wednesday. The currency's decline was exacerbated by a weaker guidance, setting it on track for its sixth consecutive monthly drop in June. As of 03:10 GMT, the yuan was 0.04% lower at 7.2659 to the dollar, trading within a range of 7.2620 to 7.2663. Over the past week, the yuan has hovered near the lower end of its daily official trading band. This trend reflects concerns over into the higher-yielding dollar and speculation that the central bank may be tolerating depreciation.

Ahead of market opening, the (PBOC) established the midpoint rate at 7.1248 per dollar. This rate, which is pivotal in determining the yuan's daily trading range within a 2% band, marked its weakest level since November. Moreover, it was 1,450 pips stronger than what had been estimated by Reuters. Under Wednesday's official guidance, the yuan is permitted to depreciate to as low as 7.2673 against the dollar. Analysts from Maybank noted the PBOC's consistent upward adjustment of the USDCNY reference rate over six sessions, reinforcing the perception that the central bank is creating space for gradual appreciation of the USDCNY pair.

The spot yuan opened trading at 7.2620 per dollar and subsequently closed 31 pips lower compared to the previous late-session close. It now stands 1.98% weaker than the midpoint rate. Overnight, the U.S. dollar strengthened following hawkish comments from officials and positive data indicating stability in the U.S. housing market. These factors suggest that the Federal Reserve may not rush to initiate a cycle of . Traders are now closely monitoring the upcoming release of the U.S. personal consumption expenditures (PCE) price index on Friday, which is considered the Fed's preferred measure of . Economists polled by Reuters anticipate that annual growth in the PCE index eased to 2.6% in May.

The yuan has experienced a 0.3% decline against the dollar this month and has depreciated by 2.3% since the beginning of the year. This decline can be attributed to various domestic challenges, including a stagnant property sector, weak consumer spending, and declining yields. These factors have led to capital outflows from the yuan and deterred foreign investors from participating in China's struggling stock market. Offshore, the yuan traded marginally lower at 7.2909 yuan per dollar during Asian trading hours. Meanwhile, the dollar's performance against a basket of six major currencies showed a slight decrease, settling at 105.66 by 03:09 GMT.

Source: Forex-Markets-Economic Times

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