China's yuan hits over 4-year high, set for fourth monthly gain

China's yuan firmed against the US dollar to its strongest level in more than four years on Friday and was headed for a fourth straight month of gains, as traders said exporters continued to convert dollar holdings into the local currency.

The spot yuan opened at 6.6600 per dollar and was last changing hands at 6.659 as of 0240 GMT, its strongest since June 6, 2022 and 22 pips firmer than the previous late-session close. The currency is on course to notch its fifth consecutive weekly advance and fourth straight monthly gain. 

The yuan has strengthened 5.0 percent so far this year, buoyed by China's robust exports. A firmer currency, however, poses a challenge for exporters, whose dollar holdings lose value as the yuan climbs. As a result, they have been selling dollars and stepping up hedging, adding further upward pressure on the yuan.

The dollar tracked Treasury yields on Friday lower as a fresh wave of selling in AI shares triggered a flight to safety. 

Prior to the market opening, the People's Bank of China set the midpoint rate at 6.7138 per dollar, its strongest since February 2023, and 590 pips weaker than a Reuters' estimate. The spot yuan is allowed to trade a maximum of 2 percent either side of the fixed midpoint each day.

The steady progression in the fixing suggests little inclination from policymakers to reverse the appreciation trend, although the pace may moderate, OCBC analysts said in a note. 

"Resilient US growth and still-elevated inflation could lend support to USD near term, but this need not derail yuan's appreciation trajectory," the analysts said. 

The dollar index which measures the greenback against a basket of six currencies, was 0.147 percent lower at 101.73.

The onshore yuan is up 0.2 percent against the dollar so far this week and 0.7 percent this month. Its offshore counterpart traded at 6.6557 per dollar, up about 0.02 percent in Asian trade. 

Based on Friday's midpoint, the yuan's trade-weighted value against its major trading partners, as measured by the yuan CFETS basket index rose to 103.77, the highest since July 15, 2022, according to Reuters calculations based on the official data.

Investors are watching statements from Bank of Japan that could weigh on the dollar and the Chinese currency. The BOJ kept interest rates steady on Friday, but revised up its inflation forecast and stressed anew its readiness to continue pushing up borrowing costs to forestall mounting inflation risks. 

Reuters

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