Yuan Extends Drop From Two-Year Low on Easing Bets, Dollar Gain

China’s yuan extended a decline from the lowest level in more than two years amid speculation the government will take further steps to support the economy after cutting interest rates for the second time in three months.

The People’s Bank of China may lower borrowing costs before May and reduce the ratio of deposits that lenders must set aside, according to the Industrial and Commercial Bank of China and China Merchants Bank. The Bloomberg Dollar Spot Index, which measures the greenback against 10 major peers, closed at a 10-year high Monday.

“The yuan is becoming less and less attractive compared with the dollar,” said Xiang Chu, a Shanghai-based foreign-exchange analyst at Industrial Bank Co. “Investors are expecting the government to announce more easing policies, which will lead to further yuan depreciation. And that is encouraging them to sell the yuan.”

The Chinese currency fell 0.02 percent to close at 6.2743 a dollar in Shanghai Tuesday, extending a three-day loss to 0.25 percent, China Foreign Exchange Trade System prices show. It reached 6.2740 on Monday, the weakest level since October 2012. The yuan traded at a 1.95 percent discount to the central bank’s fixing, near the 2 percent limit. The PBOC cut the currency’s reference rate by 0.05 percent to 6.1543, the lowest level since November 2014.

China may cut banks’ reserve-requirement ratios and interest rates to avoid deflation and boost trade figures, Liu Dongliang, a senior analyst at China Merchants Bank, wrote in a note Tuesday. The nation may lower the RRR in the first half and in the second, and cut interest rates in the second, Yang Xing, a researcher at ICBC, wrote in a commentary in the Shanghai Securities News. The PBOC cut interest rates late on Saturday, after a reduction in November.

Strongest Currency

The yuan is the world’s strongest currency after the dollar, Yi Gang, a deputy governor at the PBOC, said Tuesday as officials from around the country gathered for annual parliamentary meetings in Beijing.

China’s currency has been “very stable,” Yi Gang, who is also head of the State Administration of Foreign Exchange, said in a short interview. Asked if the yuan would weaken further, Yi said it “will remain very stable in the future.”

The authorities could widen the yuan’s daily trading band to 3 percent and allow it to weaken as deflationary pressures build, according to Credit Suisse Group AG and Commonwealth Bank of Australia. The currency has closed within 0.03 percent of the weak end of its range in each of the last six sessions. A further widening would allow depreciation that supports exports, although it runs the risk of spurring capital outflows.

Consumer prices rose 0.8 percent in January from a year earlier, the least in more than five years. Yuan positions for foreign-exchange purchases at financial institutions, a gauge of capital flows, fell to the lowest in a year in January.

The offshore yuan traded in Hong Kong was little changed at 6.2844 a dollar as of 4:44 p.m. local time, according to data compiled by Bloomberg. Twelve-month non-deliverable forwards retreated 0.02 percent to 6.4175, or 2.23 percent weaker than the Shanghai spot rate.

— With assistance by Tian Chen

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