China's yuan rose to a fresh three-year high against the dollar on Monday, as the greenback fell broadly on hopes of a deal to end the Iran war and the prospects of reopening the strategic Strait of Hormuz waterway.
The market's embrace of risk appetite comes even as US President Donald Trump played down the changes of an imminent breakthrough in the three-month-old war.
A day earlier, Trump said Washington and Iran had "largely negotiated" a memorandum of understanding on a peace deal that would reopen the strait, which typically carries a fifth of the world's oil and gas shipments.
"It might be hard to fully restore cross-strait shipping for the time being, but even a marginal recovery would be positive for financial markets," said a trader at a Chinese bank.
The weaker dollar and a strengthened midpoint rate guided by the central bank lifted the yuan on both onshore and offshore trading platforms to levels last seen in February 2023, traders said.
The onshore yuan touched a high of 6.7803 per dollar, the strongest level since February 9, 2023, before changing hands at 6.7808 as of 0335 GMT. Its offshore counterpart also rose to over a three-year peak and last fetched 6.7812 per dollar.
Before the market opened, the People's Bank of China (PBOC) set the midpoint rate at 6.8318 per dollar, the strongest setting since February 15, 2023, but 438 pips weaker than a Reuters estimate of 6.7880. The spot yuan is allowed to trade 2 percent either side of a fixed midpoint each day.
The central bank has been setting softer-than-expected midpoint fixings, a move that market participants widely interpreted as an attempt to keep the market stable.
Zhu Feng, chief China economist at J.P. Morgan, expects the central bank to keep the yuan stable and avoid excess appreciation.
"If the US does raise interest rates and China's central bank either holds rates steady or cuts them, the upward pressure on the yuan would actually ease. This would give China's monetary policy, particularly regarding exchange rate adjustments, greater room to maneuver, which is not necessarily a bad thing," Zhu said, expecting the yuan to finish this year at 6.7 per dollar.
Separately, the currency market was largely muted to China's decision to launch a major crackdown on illegal cross-border investment.
"Despite capital outflows through these retail accounts, yuan has been rising in recent months due to its strong exports performance and the return of foreign interests in China's financial markets as well," Maybank analysts said in a note.
"We see limited impact on the currency trend."
The yuan has gained more than 3 percent to the dollar so far this year.
Reuters
