China's yuan weakens as US rate hike expectations bolster dollar

[SHANGHAI] China's yuan fell against the dollar on Monday after the central bank set a weaker midpoint to reflect dollar strength on rising expectations of a US interest rate hike this month.

"Dollar demand in the market was higher than supply as investors expected the dollar to strengthen further," said a trader at a Chinese commercial bank in Shanghai.

The People's Bank of China (PBOC) set the midpoint rate at 6.3985 per dollar prior to market open, 0.21 per cent weaker than the previous fix 6.3851, the lowest since late August.

The spot market opened at 6.4021 per dollar and was changing hands at 6.4085 at midday, 0.1 per cent weaker than the previous close.

All but one of the primary dealers, brokerages that deal directly with the US Federal Reserve, believe the Fed is going to raise rates at the end of its Dec 16 meeting, according to a Reuters poll.

The dollar index, which stood at 98.441 by midday on Monday, has recovered since late last week after upbeat payrolls data bolstered the case for an imminent hike in US interest rates.

On expectations of US monetary tightening, the yuan closed sharply down against the dollar on Friday, at its weakest since late August.

The yuan has also been weighed down by the apparent lack of support from the PBOC lately, after the Chinese currency was admitted into the International Monetary Fund's benchmark reserve basket.

"We cannot tell what is the central bank's acceptable range for the yuan," said a trader at a foreign bank in Shanghai.

The IMF announced on Nov 30 that it would include the yuan in its Special Drawing Rights (SDR) basket, an important milestone in China's integration into global finances.

Hours after the IMF announcement, China's central bank said there was no basis for the yuan to continue to devalue, and it would keep the currency basically stable as it would intervene in the market when there were abnormal international payments or capital moves.

Offshore yuan was trading 0.77 per cent weaker than the onshore spot at 6.4584 per dollar by midday.

REUTERS