Offshore yuan weakens as capital is drawn to high-yielding dollars by interest rate increases
China’s currency weakened by 0.5 per cent against the US dollar to a 12-month low as a declaration of higher interest rates by the chairman of the US Federal Reserve spurred capital to flow into higher-yielding dollars from offshore yuan.
Offshore yuan, which is traded by international investors outside mainland China, deteriorated to 6.7439 per dollar, down from 6.7100 a day earlier, according to Thomson Reuters data. The currency fell further down in the afternoon to trade at 6.7574 on Wednesday evening.
The yuan has weakened by 3.1 per cent against the dollar, making it the fifth-biggest loser out of 12 Asian currencies.
Onshore yuan, which is traded by mainland traders also weakened, falling to 6.7149 on Wednesday, after the Chinese central bank set the midpoint of its price guidance lower by 93 basis points against the dollar. It closed at 6.7197 on Wednesday.
“The yuan fell sharply on Wednesday morning after the US Federal Reserve chairman Jerome Powell said the US economy is running at a fast enough pace to justify continued interest rate increases this year,” said Tommy Ong, managing director of treasury and markets at DBS Hong Kong. “The hawkish statement has led the market to believe that there will be more US interest rate increases in future. This has strengthened the US dollar and led to a decline in other major currencies and the yuan.”
Offshore yuan weakened by 5.4 per cent from June 14 to July 3, its longest 14-day losing streak, after the People’s Bank of China opted to not follow the US Fed in increasing the benchmark interest rate.
The US monetary authority has increased the benchmark interest rate twice this year in quarter-point increments, and is expected to raise the level twice more before the end of 2018.
“Looking ahead, the yuan is likely to continue to weaken further to around 6.8500 level,” Ong said. “The Chinese economic outlook is likely to continue to be haunted by the ongoing trade war between China and the US. This is going to lead to the yuan’s drop.”