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Yuan retreats as US dollar rallies on Yellen’s hawkish remarks

The onshore yuan in Shanghai fell 0.43pc to 6.8627 against the US dollar by 10.30am, ending three days of gains

PUBLISHED : Thursday, 19 January, 2017, 11:47am
UPDATED : Thursday, 19 January, 2017, 11:47am

The Chinese yuan ended its three-day rally on Wednesday morning, as US dollar strengthened after Federal Reserve chair indicated more interest rate rises were likely in the coming years.

The onshore yuan in Shanghai fell 0.43 per cent or 293 points to 6.8627 against the US dollar by 10.30am, ending three days of gains, after the People’s Bank of China set the yuan reference rate 43 points weaker at 6.8568 per dollar. The offshore yuan in Hong Kong strengthened slightly, up 22 points or 0.03 per cent to 6.8382 per dollar.

The US Dollar Index picked up 1 per cent to 101.32 overnight on Thursday, after Fed chair Janet Yellen said that it “makes sense” for the US central bank to gradually raise interest rates, given that inflation is approaching the Fed’s goal of 2 per cent and full employment is around the corner.

Yellen said there are likely tobe several rate rises by the end of 2019.

The pound and euro both weakened in overnight trading amid the dollar’s strength. They recovered slightly on Thursday morning — the pound rose by 22 cents or 0.17 per cent to US$1.2283, while euro inching higher 0.08 per cent to US$1.0638.

Yellen’s speech was accompanied by the latest inflation data released by the US Labour Department, which shows the Consumer Price Index for December rose 2.1 per cent year on year, the biggest rise since June 2014.

Investors reacted actively to Yellen’s comments, viewing them as hawkish, after Donald Trump’s remarks had dragged down the US dollar earlier in the week, analysts at Aetos Capital said in a report, adding that the next threshold will be 101.7.

The broader dollar picture dominated trade overnight. US Treasury yields rallied overnight, underpinned by Hawkish Fed speak
Stephen Innes, senior trader at Oanda

Trump said in an interview with the Wall Street Journal that the US dollar was “too strong” to compete with its counterpart in China.

“The broader dollar picture dominated trade overnight. US Treasury yields rallied overnight, underpinned by Hawkish Fed speak,” said Stephen Innes, a senior trader at Oanda.

The question now is whether Yellen supports the idea that there will be three interest rate rises this year alone, Innes said, adding that dealers will now be looking for more clarity during the Fed’s next meeting in March.