China's yuan inches higher as midpoint rate firmer despite US rate hike

China's yuan rose slightly against the US dollar on Thursday as the central bank lifted the midpoint fixing to another 3-1/2-year high despite a jump in the greenback after the ​Federal Reserve raised interest rates.

The dollar clung to a seven-week high on Thursday after the ​Fed raised interest rates by a quarter overnight and flagged more hikes in coming months.

Shrugging off the dollar rally, prior to the market opening, the People's Bank of China set the midpoint rate at 6.7580 per dollar, its strongest since February 3, 2023, and 339 pips weaker than a Reuters' estimate. The spot yuan is allowed to trade 2 percent either side of the fixed midpoint each day.

Kimmy Tong, an FX strategist at Everbright Securities, believes the central bank uses a "counter-cyclical adjustment" within its fixing formula to curb excessive volatility and signal a clear preference for currency stability.

The central bank may also want to "maintain strong position of yuan before Golden Week and US-China leader meeting," Tong said.

The spot yuan was 0.03 percent higher at 6.7083 to the dollar as of 0349 GMT, after trading in a range of 6.7082 to 6.7128.

Some analysts said the US rate hike had already been largely priced in by the market, while the pricing of yuan is not driven entirely by the China-US interest rate differential.

"The trend of continued strengthening in corporate foreign exchange settlement since the beginning of this year has remained in place," said Tim Sun, senior researcher at HashKey Group. "For now, this force is strong enough to offset the external pressure from the US dollar and the interest-rate differential."

The yuan is up 0.2 percent against the dollar this month, and 4.2 percent firmer this year, hovering around a multi-year high of 6.70, benefiting from strong exports and dollar weakness.

Kevin Liu, a strategist at CICC, expects the yuan's appreciation to be moderate this year given the weak domestic demand.

The offshore yuan traded at 6.7086 yuan per dollar, up about 0.06 percent in Asian trade.

The dollar's six-currency index was 0.070 percent higher at 100.33.

Separately in Hong Kong, the Hong Kong Monetary Authority raised rates for the first time since July 2023, tracking the US hike.

Reuters

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