Yuan declines most in three weeks as US jobs data buoy US dollar

[HONG KONG] The yuan fell the most in three weeks after a better-than-expected US jobs report fuelled speculation the Federal Reserve will raise interest rates this year.

China's central bank cut its daily reference rate to the lowest in more than a week after a gauge of US dollar strength climbed. The People's Bank of China said in a report late Friday that a reduction to lenders' reserve requirements would add too much liquidity to the financial system and pressure the yuan downward. The nation's foreign-exchange reserves were little changed last month, data showed Sunday, suggesting an easing of capital outflows.

"US data have been strong, and it's still quite likely the Fed will raise rates this year," said Liu Dongliang, a senior analyst at China Merchants Bank Co in Shenzhen.

"The market is paying less attention to China's reserve data now. There's no need to be that concerned about capital outflows."

The yuan declined 0.14 per cent, the most since July 18, to 6.6601 a US dollar as of 10:27 am in Shanghai. The offshore exchange rate in Hong Kong dropped 0.04 per cent. The PBOC weakened its daily fixingby 0.31 per cent to 6.6615.

China's reserves fell by US$4.1 billion to US$3.2 trillion in July, in line with the median estimate of economists surveyed by Bloomberg. A stronger yen and euro also aided the US dollar valuation of the stockpile. Reserves will remain mostly stable this year as the country continues its tight control of outflows, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp, wrote in a note.

Data on Monday will show exports dropped 3.5 per cent in July, compared with a 4.8 per cent decline in June, according to the median estimate in a Bloomberg survey of analysts. A Bloomberg replica of the trade-weighted CFETS RMB Index, which tracks the yuan against 13 currencies, was little changed on Monday.

The chances of a Fed interest-rate increase by the end of the year have risen to 47 per cent, from 37 per cent a day before the jobs data.

BLOOMBERG