Yuan strengthens as US dollar slides before Trump takes office

PUBLISHED : Friday, 20 January, 2017, 11:54am
UPDATED : Friday, 20 January, 2017, 11:54am

The Chinese yuan was stronger against the US dollar on Friday ahead of the inauguration of US president-elect Donald Trump, along with a batch of other major currencies, including the British pound, the euro and the Japanese yen.

The onshore yuan in Shanghai strengthened 33 points or 0.05 per cent to 6.8727 against the US dollar at 10.25am. The offshore yuan in Hong Kong rose 80 points or 0.12 per cent to 6.8391.

On Friday, the People’s Bank of China on Friday set the yuan’s reference rate at 6.8693 per dollar, 125 points or 0.18 per cent weaker than the previous fixing, representing the biggest one-day drop since January 9. The yuan weakened Thursday versus the US dollar.

The US dollar index fell 0.13 per cent to 101.0 on Friday morning ahead of the inauguration of Trump. The euro rose 0.11 per cent to US$1.0674. The British pound was also up 0.08 per cent to US$1.2348.

Earlier this week, Trump and the Federal Reserve officials sent mixed signals about the US dollar, which caused the greenback to fluctuate.

Although Trump was quoted in a recent report by The Wall Street Journal as saying that the US dollar was “too strong” for the US to compete with its trading counterpart China, his policies are likely to push the currency further up, said Mark Wan, chief analyst at Hang Seng Investment Services.

“He has asked car manufacturers to move factories back to the US. Those policies will push up overall prices and lead to higher inflation, and give support to the US dollar,” Wan said.

Federal Reserve chair Janet Yellen said earlier this week that there may be several rate rises each year through the end of 2019. Meantime, the European Central Bank’s resolve to maintain interest rate unchanged and the upcoming elections in Netherlands, France and Italy would put pressure to Euro, giving more support to the greenback, he said.

“I expect the DXY Index [the US dollar index] to reach 106 by the first half,” Wan said.

“It will be hard for the euro to break above the US$1.08 level. For the pound, there is only one direction, which is depreciation, as the UK is on track for Brexit,” he added.

The markets may also test both the strength of the offshore yuan and the PBoC’s resolve to defend the currency in the first several months of the Trump administration, said Stephen Innes, senior trader at OANDA said.

Higher US treasury yields could weigh on the yuan, while the ambiguity in the US trade policy will also add “an unwanted air of confusion”, he said.