Yuan surges to hit decade high against dollar

The yuan strengthened to its strongest against the greenback in more than a decade on Friday. Investors and analysts say the US Federal Reserve’s cautious stance on monetary tightening and market optimism about global trade boosted the yuan while depressing the US dollar.

By the end of Friday’s trading, the yuan had surged around 0.7 percent to roughly 6.74 to the dollar, recovering a considerable part of its steep losses since April 2018 and marking a vigorous start to the new year.

“The current appreciation in the CNY came mainly as a result of the overall pressure on the US dollar index and the expectation for an easing of the China-US trade dispute,” said the foreign exchange desk of the Treasury Department at Bank of China New York Branch, in an analysis.

China’s economy has been undergoing structural reform with the introduction of various macroeconomic policies. The bank said that the yuan’s strong buying momentum showed world financial markets have restored confidence in the Chinese currency.

“With the deepening of China’s reform and opening-up, steady expansion of the domestic financial market and the higher status of the CNY in the international monetary system, it is expected that investors’ willingness to hold CNY will increase further,” said the analysis.

The resumption of trade talks between the United States and China is another boost for market optimism and the rise of the yuan, it added.

Danske Bank, the largest bank in Denmark, said that the significant depreciation pressure on the yuan is turning into a moderate strengthening trend.

“We see two main drivers behind the stronger CNY: One, rising optimism about a trade deal with the United States and China; Two, an overall weakening of the USD on the back of more dovish speeches by Federal Reserve members that suggest rates will be on hold for a while,” it said in a note on Friday.

The Danish bank said market expectations for progress in China-US trade talks and for the performance of the Chinese economy in the second quarter this year offer “more tailwinds ahead” for the yuan.

Bank of America Merrill Lynch predicted that the yuan would rally toward 6.65 yuan to the dollar, given that possible progress in the China-US trade talks would result in “risk-on” emerging market sentiment, according to its weekly foreign exchange report released on Friday.

It also expected the dollar to weaken in 2019 over the waning US fiscal stimulus, the ongoing US government shutdown, and a cautious Fed that has become more dependent on economic data in policy-making.

The latest remarks of the Fed’s chair and other officials continued to weigh heavily against the dollar, as investors strengthened their bets on fewer interest rate hikes in 2019.

Fed Chairman Jerome Powell urged patience in the central bank’s policy-making at a forum at the Economic Club of Washington on Thursday, saying “we’re waiting and watching,” as inflation is “low and under control.”

Bank of China said Powell’s remarks strengthened the Fed’s dovish attitude, which drove down the US dollar index. The index, which measures the greenback against six major currencies, is a key metric of its value.