(Bloomberg) -- A jump in China’s yuan to a more than one-year high is testing the central bank’s appetite for currency strength.
The yuan climbed 0.4% to 6.8211 a dollar, the strongest level since May 2019, as the dollar traded at a two-year low. The advance came even after the central bank set its daily fixing for the currency at levels weaker than traders and analysts had expected for three sessions through Monday. Those moves could be taken as a sign that Beijing hoped to slow the gains.
The rally has extended the Chinese currency’s advance since this year’s nadir in May to 5%, as the best-performing exchange rate in Asia. A strong yuan isn’t ideal when the nation’s economy is recovering from the coronavirus pandemic and confronted with escalating tensions with the U.S. because it could undermine the attractiveness of China’s exports to the world.
The yuan’s gain versus its trading partners’ currencies is much milder compared with its move against the dollar. The Bloomberg CFETS RMB Index Tracker, which measures the yuan versus 24 peers, has risen just 2.4% from a record low last year. The gauge currently stands at 92.95.
“The yuan will likely advance further as the dollar weakens,” said Tommy Xie, an economist at Oversea Chinese Banking Corp. “The central bank could use the fixing to limit the gains when the yuan index climbs to 94 or 95.”
The recent rally marks a turnaround from earlier in 2020, when the offshore rate neared the weakest level ever. The yuan has been resilient as China-U.S. tensions have expanded from a trade war to issues including the tech industry and a national security law in Hong Kong. Its interest rate premium over the greenback is near the highest on record, which attracts inflows to Chinese assets and boosts the currency.
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