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January 6, 2017

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Yuan’s rise knocks the wind out of US dollar

SOME of the biggest gains on record for the yuan sent currency markets spinning yesterday, driving the US dollar broadly lower and threatening to quash one of the central bets of global investors for 2017.

The yuan firmed against the US dollar onshore yesterday by the most in nearly a year as the Chinese central bank raised the currency’s official guidance rate amid a slight weakening of the dollar.

The yuan closed at 6.8817 in Shanghai by 4:30pm yesterday, up 668 basis points from Wednesday, recording the largest daily move in 11 months.

The firming came after the People’s Bank of China set the yuan’s central parity rate at 6.9307 per US dollar, 219 basis points stronger than Wednesday’s.

It was the largest daily move since December 6 last year.

The yuan can trade between 2 percent either side of the official guidance rate.

On the offshore market in Hong Kong, the yuan firmed from 6.87 to briefly touch the 6.80 against the US dollar, a nearly two-month high.

Zhou Hao, a Singapore-based economist with CommerzBank, attributed the tight yuan liquidity in Hong Kong, high borrowing costs, and a correction of the US dollar as factors for the strengthening of the yuan offshore.

The overnight Hong Kong Interbank Offer Rate, the benchmark for short-term funding cost of offshore yuan, touched 38 percent yesterday, driving up the costs to short the yuan.

That in turn triggered a broader round of profit-taking on the dollar, sending it more than 1 percent lower against the yen and as low as US$1.0575 to the euro before a late-morning recovery in Europe.

The US dollar index dipped in the past two days after the Federal Reserve softened its stance on interest rate hikes this year, leaving the market to speculate the Fed may abandon the original plan to lift interest rates three times.

A year after a tussle between China and hedge funds betting against the yuan, many major asset managers and banks have called for the currency to fall in 2017. Dealers said yesterday’s moves had the potential to squeeze many players out of those positions just five days into January.

“They have kick-started a move that has washed out short-term speculative money,” currency fund Millennium Global’s co-head of portfolio management, Richard Benson, said.

“This isn’t economics. China desperately doesn’t want a repeat of what happened this time last year (and it seems) attack is the best part of defense.”

Many banks and investors have also lined up bets on a broadly stronger dollar in the year ahead, trusting that a Donald Trump White House will raise public spending, spur inflation and encourage repatriation of corporate funds held abroad.

But the dollar’s failure to move closer to parity with the euro, or to 120 yen, since mid-December has fuelled doubts about its ability to gain further, at least before Trump’s inauguration.

The dollar’s index against a basket of six major currencies slipped to as low as 101.86, a three-week low, just two days after it had hit a 14-year high of 103.82 on Tuesday, when a strong reading from a US manufacturing survey boosted the dollar.


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