India Rupee Falls to Three-Week Low as China Fuels Risk Aversion

  • PBOC cuts yuan fixing to the lowest since April 2011
  • A gauge of dollar strength rises for an eighth straight day

India’s rupee dropped to a three-week low as demand for riskier assets ebbed after China weakened the yuan’s fixing to the lowest since 2011 and North Korea said it tested a hydrogen bomb.

The rupee declined 0.4 percent to 66.83 a dollar in Mumbai, prices from local banks compiled by Bloomberg show. It fell to 66.8350 earlier, the weakest level since Dec. 16. A gauge of dollar strength advanced for an eighth day, set for its longest run of gains since September 2014.

The yuan sank to a five-year low as the People’s Bank of China lowered its reference rate for a seventh day, spurring speculation policy makers are becoming more tolerant of depreciation as intervention costs rise and economic growth slows. While allowing weakness may help the Chinese economy, it risks spooking global markets, according to Japan’s Resona Bank Ltd.

“The yuan is pulling all other Asian currencies lower,” said Paresh Nayar, Mumbai-based head of currency and money markets at the local unit of South African lender FirstRand Ltd. “A deepening slowdown in China will have an impact on other countries as well,” he said, adding that the dollar’s strength is also weighing on the rupee.

Investor sentiment also soured as North Korea conducted its fourth underground nuclear test Wednesday, risking reigniting tensions with China and the U.S. after months of calm even as some experts cast doubt on the full extent of Pyongyang’s claim.

Bond Yields

The yield on Indian sovereign bonds due May 2025 was little changed at 7.74 percent, prices from the central bank’s trading system show. India missed its target at an auction of treasury bills for the first time since May, leading to speculation some investors demanded higher yields amid the selloff in emerging markets.

The PBOC had shocked global markets with its yuan devaluation in August, saying at the time that it was revamping the fixing system to give market forces greater sway. Authorities in the world’s second-largest economy revived intervention in the stock market this week, seeking to stem a rout.

“Broadly, it does mean weaker Asia currencies if the yuan is weakening but it’s going to be to varying degrees,” said Mitul Kotecha, Singapore-based head of Asia currency and rates strategy at Barclays Plc. “Currencies like the Korean won, Taiwan dollar and Singapore dollar will be more sensitive to yuan gyrations.”

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