Yuan Drops Most in Two Months as Dollar Climbs, Inflation Eases

China’s yuan fell the most in more than two months as minutes of the Federal Reserve’s December meeting showed policy makers saw diminishing economic benefits from their monetary stimulus.

The Bloomberg Dollar Index, which tracks the greenback against its major peers, climbed to a four-month high yesterday as the Fed starts cutting its record bond purchases this month. Inflation in China slowed to 2.5 percent in December, the least in seven months, data showed today.

“The U.S. dollar strengthened, and as the Fed continues to taper its stimulus, funds may return to the U.S.,” said Bruce Yam, a Hong Kong-based foreign-exchange strategist at Sun Hung Kai Forex. “China’s inflation rate fell, which shows consumer spending may be slowing.”

The yuan declined 0.06 percent to 6.0550 per dollar in Shanghai, China Foreign Exchange Trade System prices show. That’s the biggest drop since Nov. 1. The People’s Bank of China cut the currency’s daily reference rate by 0.05 percent to 6.1109, the lowest level in two weeks.

In Hong Kong, the offshore yuan retreated from a record high reached yesterday, weakening 0.04 percent to 6.0378 per dollar. Twelve-month non-deliverable forwards fell 0.05 percent to 6.1190, data compiled by Bloomberg show. The contracts traded at a 1 percent discount to the spot rate.

One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, decreased seven basis points, or 0.07 percentage point, to 1.22 percent, data compiled by Bloomberg show.

Fed officials judged that the “efficacy” of their bond buying program was diminishing, according to a record of last month’s meeting released yesterday. The central bank will probably cut its purchases in $10 billion increments over the next seven meetings before ending them in December, according to a Bloomberg News survey of economists.

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