China's yuan weakens as Fed rate hike expectations grow

[SHANGHAI] The yuan edged lower against the dollar on Tuesday, on track for it second largest monthly fall on record, after the central bank softened its midpoint to a new 5-year low amid growing prospects of a US interest rate hike.

"The bearish pressure facing the yuan right now comes from the strong performance of the dollar, which is within market expectations," said a trader at a Chinese commercial bank in Shanghai.

"Traders and their corporate clients believe this bout of yuan depreciation will not last. Overall, the sentiment is stable." If the yuan closes around the midday level, it will end the month 1.6 per cent lower, its second biggest monthly decline on record.

The currency recorded its biggest monthly fall of 2.7 per cent in August 2015 when the central bank devalued the currency.

The monthly drop in May is also likely to exceed its December decline of 1.5 per cent when the Federal Reserve interest rate hike that month led to a record monthly fall in the country's foreign exchange reserves.

The People's Bank of China on Tuesday set the midpoint rate at 6.579 per dollar prior to market open, only 0.01 per cent weaker than the previous fix 6.5784 and within market expectations.

Spot yuan opened at 6.5801 per dollar and was changing hands at 6.5827 around midday, only 0.02 per cent softer than the previous close.

Traders said the currency has stabilised at around 6.5825 while the central bank is believed to have stayed on the sidelines in the onshore market.

By midday, the offshore yuan was trading 0.10 per cent softer than the onshore spot at 6.5894 per dollar.

Offshore one-year non-deliverable forwards contracts , considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.7595, 2.67 per cent weaker than the midpoint.

REUTERS