China's yuan weakens on Fed official's hawkish comments

The global dollar index rose to 104.559 from the previous close of 104.483.

HONG KONG (Web Desk) - China’s yuan weakened on Thursday as investors turned their focus back to the US dollar after hawkish comments by a Federal Reserve official revived concerns that its restrictive interest rate policy would persist.

The market is also awaiting further direction ahead of the annual meeting of the National Party Congress, China’s parliament, slated to begin this Sunday. Investors are watching for any further government measures to stimulate the recovery of the economy.

On Wednesday, Minneapolis Fed President Neel Kashkari said he was inclined “to push up my policy path” to see interest rate rise beyond the 5.4% level, a level which he previously thought would be enough to tame inflation, after a recent government report showed that inflation in January rose to more than double the Fed’s 2% target.

“Weighing on the yuan is the uncertainty about whether the US central bank will stick with a 25 basis point (bps) hike at its next meeting in March, or raise by a higher 50 bps,” said Kirk Wong, a global market and FX strategist at Everbright Securities International.

The spot yuan opened at 6.8836 per dollar and was changing hands at 6.8947 at midday, 218 pips weaker than the previous late session close and 0.20% away from the midpoint.

The People’s Bank of China set the midpoint rate at 6.8808 per US dollar prior to the market open, firmer than the previous fix of 6.94.

The spot rate is allowed to trade with a range 2% above or below the official fixing on any given day.

The federal funds rate is currently set in a range from 4.5% to 4.75% Investors fear a higher US interest rate would fuel the dollar strength and weigh on emerging currencies such as the yuan.

The global dollar index rose to 104.559 from the previous close of 104.483.

The yuan jumped on Wednesday as strong factory activity datareaffirmed investors’ optimism that the government’s economic measures to stabilize the pandemic-hit economy are beginning to pay off, paving the way for a strong rebound.

But traders said the offshore yuan retraced some of those gains on Thursday as some of the option trades responsible for its rally had eased.

These option traders, who held US dollars, had to buy offshore yuan to stop losses after the option’s strike-level was triggered on Wednesday.

The offshore yuan was trading -0.09% away from the onshore spot at 6.9012 per dollar.

The one-year forward value for the offshore yuan traded at 6.7222 per dollar, indicating a roughly 2.66% appreciation within 12 months.