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China's yuan eases, market prices in Fed hike prospects

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The yuan eased against the US dollar to hover near its two-month trough on Wednesday, as companies rushed to buy the US currency on increased prospects of a US interest rate hike.

[SHANGHAI] The yuan eased against the US dollar to hover near its two-month trough on Wednesday, as companies rushed to buy the US currency on increased prospects of a US interest rate hike.

The market started to price in rising expectations of the Federal Reserve raising rates as early as June after US inflation, industrial production and housing starts data showed the US economy re-accelerating into the second quarter.

The People's Bank of China set the midpoint rate at 6.5216 per US dollar prior to market open, only 0.02 per cent weaker than the previous fix 6.5200, in response to a little changed US dollar overnight.

The spot yuan opened at 6.5254 per US dollar and was changing hands at 6.5337 at midday, weakening 0.12 per cent from the previous close, and 121 pips softer than the midpoint.

"The dollar will remain strong for sure in the near term," said a trader at a Chinese commercial bank in Shanghai.

"My estimate is that the yuan will face renewed depreciation pressure if the dollar index goes above 95."

The dollar index that tracks the greenback against six major currencies was at 94.773 in Asian trade around midday, up 0.2 per cent from the previous day.

The offshore yuan was trading 0.27 per cent softer than the onshore spot at 6.5517 per US dollar. The spread of around 200 pips has persisted in the past seven trading days, indicating a re-emergence of bearish pressure on the yuan, traders said.

On Tuesday, the country's Premier Li Keqiang said China would be able to keep its economic growth within a reasonable range, even as it faces difficulties and challenges.

REUTERS