China’s yuan strengthens as dollar pulls back on Fed cut focus

HONG KONG, Aug 20 (Reuters) –China’s yuan rose against the dollar on Tuesday, as the greenback fell to a seven-month low on growing expectations the U.S. central bank will cut interest rates next month.

The currency also found support from China’s decision to leave benchmark lending rates unchanged and a broad rally in Asian foreign exchange.

The spot yuan CNY=CFXS opened at 7.1295 per dollar, the strongest since Aug. 5, and was last trading 58 pips below the previous late session close and 0.17% weaker than the midpoint.

The dollar is also under pressure ahead of the Federal Reserve’s Jackson Hole economic symposium on Friday.

Investors largely assume Fed Chair Jerome Powell will send a stronger signal of rate cuts at the gathering, against the backdrop of cooling inflation.

Smaller-than-expected U.S. rate cuts, however, would keep the rate differential wide, limiting gains for the yuan, DBS Bank Global Market Strategist Carie Li said.

Although China kept its lending benchmark unchanged this month, analysts expect Beijing to continue monetary easing, including another rate cut in the fourth quarter as domestic demand and home prices weaken.

The yuan is up 1.1% against the dollar this month but off 0.6% for the year. It has been under pressure since early 2023 as a moribund property sector, anemic consumption and falling yields drive capital flows out of yuan and foreign investors stay away from its struggling stock market.

Prior to the market opening, the People’s Bank of China set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1325 per dollar, 8 pips weaker than a Reuters’ estimate.

Despite dollar weakness, China’s central bank continues to scale back its forex policy support rather than pursue a stronger currency, said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

“In this sense, the PBoC has managed to achieve its task of unleashing the CNY depreciation pressure,” he said.

The offshore yuan traded at 7.1412 yuan per dollar CNH=, down about 0.11% in Asian trade.

The dollar’s six-currency index =USD was 0.088% higher at 101.96.

Key onshore vs offshore levels:

Overnight dollar/yuan swap onshore -8.00 pips vs. offshore -8.00

Three-month SHIBOR SHIBOR= 1.8 % vs. 3-month CNH HIBOR 2.1 %

LEVELS AT 03:46 GMT

Reporting by Summer Zhen; Editing by Sam Holmes