Yuan Surges Most in a Year as Fed Eases Capital Outflows Concern

China’s yuan gained the most in a year after the Federal Reserve indicated U.S. interest rates will rise slowly once it starts tightening, which may temper outflows from emerging markets.

The Fed, while noting expansion has moderated, said a rate rise in April is unlikely and that it won’t tighten policy until it is “reasonably confident” inflation will return to its target and the labor market improves. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, dropped by the most in six years after the statement Wednesday.

The yuan rose 0.54 percent, the biggest gain since March 2014, to close at 6.1961 a dollar in Shanghai, China Foreign Exchange Trade System prices show. That took its three-day advance to 1.07 percent, the most in eight years. The People’s Bank of China raised its daily fixing by 0.16 percent, the most in six weeks, to 6.1460.

“It’s obviously a Fed-driven move,” said Sacha Tihanyi, a Hong Kong-based senior currency strategist at Scotiabank. “While they opened the door for a June rate hike, their statement also introduced some dovish sentiment.”

The offshore yuan surged 0.37 percent for a four-day gain of 1.15 percent to 6.2141 in Hong Kong, according to data compiled by Bloomberg. Twelve-month non-deliverable yuan forwards strengthened 0.11 percent to 6.3730, 2.78 percent weaker than the spot rate in Shanghai. The onshore yuan’s gap to the PBOC fixing was 0.82 percent, the smallest since Dec. 8.

‘Still Bullish’

China’s capital outflows concern may be tempered after the Fed’s comments, and the PBOC will likely become more flexible as worries about a weaker yuan ease, Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp., said in an interview.

China is in talks with the International Monetary Fund to include the yuan in the institution’s basket of reserve currencies, PBOC Deputy Governor Yi Gang said in Beijing on March 12. The currency will decline 0.22 percent the rest of this year to 6.21 a dollar at the end of 2015, according to the median estimate in a Bloomberg survey.

“The fundamentals are still bullish for the yuan with the government’s plan to make it a reserve currency,” said Scotiabank’s Tihanyi. The PBOC fixings also send a “strong signal” that the authorities favor a stable currency, he said.

— With assistance by Fion Li, and Tian Chen

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