Yuan's Losing Streak Signals PBOC Break With Stronger Dollar

  • Chinese currency may have to drop more quickly vs USD: analyst
  • Two Fed officials signaled June interest-rate rise is possible

Why Debt in China May Impact Dollar Strength

The yuan fell for a third day against the dollar on concern authorities prefer a weaker currency to stability versus the greenback.

The dollar’s slump this year has allowed the People’s Bank of China to weaken the yuan against a basket of currencies, while keeping it steady against its U.S. counterpart. This strategy is being undermined by the greenback’s biggest two-day jump since November, fueled by signals the Federal Reserve may raise interest rates next month. The risk now is that in order for the yuan to continue falling versus its major peers, it will have to drop more quickly against the greenback, according to Oversea-Chinese Banking Corp.

The slide in an index that tracks the yuan against 13 peers “flagged the warning signal that China may prefer a weaker basket currency,” said Tommy Xie, a Singapore-based economist at OCBC. “The concern that the yuan may have to depreciate faster against the dollar should the dollar regain strength in the global market worries investors.”

The PBOC cut the daily fixing by 0.28 percent to 6.5128 per dollar on Thursday, the weakest since March 28, after a gauge of the dollar jumped 0.5 percent the day before. The yuan slipped 0.06 percent to 6.5055 as of 4:56 p.m. in Shanghai, taking its three-day loss to 0.4 percent. The offshore yuan was little changed at 6.5159.

‘Real Option’

Atlanta Fed President Dennis Lockhart called a June rate increase “a real option” this week, while San Francisco’s John Williams said he would support such a move at the next meeting provided the U.S. economy stayed on track.

A Bloomberg replica of the CFETS RMB Index was little changed at 96.56 on Thursday. It has dropped 0.56 percent this week.

China might not want the index to drop further as that would entail the yuan falling more quickly versus the dollar than other currencies, said Gao Qi, a strategist at Bank of Nova Scotia.

“That will lead to competitive devaluation; the central bank wouldn’t want that,” he said. The PBOC would prefer a stable or even rising index in a strong-dollar environment, he added.

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