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Yuan on verge of five-year low as losses quicken on Fed, economy

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The yuan drew closer to eclipsing the lows reached during January's turmoil as factory data failed to damp concern about the economic outlook and speculation mounted that the Federal Reserve is preparing to raise interest rates.

[SHANGHAI] The yuan drew closer to eclipsing the lows reached during January's turmoil as factory data failed to damp concern about the economic outlook and speculation mounted that the Federal Reserve is preparing to raise interest rates.

The Chinese currency fell 0.24 per cent to 6.5938 per US dollar at 11:22 am in Shanghai, less than 0.1 per cent away from its five-year low in January. The currency slumped 1.5 per cent in May, its biggest loss since August's devaluation, as a gauge of the greenback's strength surged the most since 2014.

Manufacturing gauges released Wednesday showed activity remained subdued in May, after April economic data trailed estimates.

Investors are now predicting a 53 per cent chance the Fed will raise interest rates at its July meeting, up from 26 per cent a month ago. The US and China will hold their annual economic meeting next week.

sentifi.com

Market voices on:

"Today's PMI reports and the recent dollar strength both point to further weakening pressure on the yuan," said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd.

"The PBOC may also want to let the currency follow market forces to weaken ahead of the US-China economic dialogue later this month."

The losses come amid signs the nation's authorities are more comfortable letting the yuan weaken. The nation's foreign reserves increased by a combined US$17 billion in March and April, a sign that the central bank is spending less on intervention after the currency hoard shrank by US$599 billion in the previous 12 months.

Estimated capital outflows moderated to about US$44 billion in March, the latest figures available, from US$144 billion in January.

The end of a temporary sweet spot that China enjoyed with its exchange rate - strength versus the US dollar and weakness against trading partners - will spur renewed capital outflows, Goldman Sachs Gao Hua Securities Co said last week.

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