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Yuan heads for best gain in a month, shrugs off China easing

Its gain comes as dollar declines; extra liquidity is to offset funding squeeze ahead of Lunar New Year holiday

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The gap between the yield on China's 10-year government bonds and their US equivalents has doubled over the past two months, making yuan-denominated assets more attractive.

Hong Kong

CHINA'S yuan headed for its biggest gain against the dollar in a month, unperturbed by the central bank's monetary easing as the country's economy slows.

The Chinese currency climbed as much as 0.4 per cent, the most since Dec 4, to its strongest in nearly five weeks. The currency has now advanced almost 1 per cent since mid-December.

The greenback, meanwhile, is on the decline against most currencies, falling to a more than two-month low on Monday on signs the Federal Reserve may pause interest-rate increases.

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"Market sentiment has improved," said Gao Qi, a strategist at Scotiabank. "The reserve requirement ratio cut has raised hope that the economy will get better, and investors expect the yuan to remain steady as China and the US hold trade talks in Beijing this week."

The People's Bank of China said on Friday it would cut the amount of cash lenders must hold as reserves. The goal is to release more liquidity and offset a funding squeeze ahead of the Lunar New Year holiday, which falls early next month. The yuan pared some gains after the announcement, but still finished the day up 0.03 per cent. It was at 6.8497 per dollar at 3.44 pm on Monday.

The currency could strengthen to 6.7 or 6.8 per dollar in the next two months, Singapore-based Mr Gao said, adding that he was optimistic the US and China will make progress toward a trade deal in that time.

Officials from the two countries meet this week for the first time since presidents Xi Jinping and Donald Trump agreed in early December to a 90-day truce in the trade dispute.

Fed Chairman Jerome Powell said on Friday that policy is flexible and officials are "listening carefully" to financial markets. The gap between the yield on China's 10-year government bonds and their US equivalents doubled over the past two months, making yuan-denominated assets more attractive.

"With the dollar softening following Powell's speech and US 10-year bond yields well off their highs, this has helped the yuan shrug off the RRR cut and strengthen," said Khoon Goh, head of research at Australia & New Zealand Banking Group in Singapore.

"I see scope for further yuan appreciation" as exporters change foreign-currency holdings back into the Chinese currency before the holiday.

The offshore yuan also strengthened on Monday, advancing 0.26 per cent to 6.8483 per dollar, its highest intraday level since Dec 5.

China's stock market wasn't quite so enthused - the Shanghai Composite Index mustered a 0.7 per cent gain, with banks' mainland shares slipping. BLOOMBERG