In the onshore market, the yuan gained about 0.15% and was on track for its third consecutive weekly advance. The currency has also drawn support from expectations that next week’s meeting between US President Donald Trump and Chinese President Xi Jinping could help ease trade tensions, Reuters reported.
The offshore yuan rose to 6.6956 per dollar in morning trading, its strongest level since July 2022. The onshore yuan traded at 6.6983 per dollar in late morning trade, its firmest level since January 2023.
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Bank of America expects the yuan to strengthen another 1.6% by the end of the year, citing the conversion of exporters’ dollar earnings, the yuan’s relative undervaluation and growing pressure from G7 economies to address trade imbalances.
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The dollar index had gained earlier this week ahead of the US Federal Reserve’s rate decision on Wednesday, but those gains eased on Friday.
Nanhua Futures said the yuan’s appreciation trend remained intact despite the shift in US monetary policy. The brokerage expects the Chinese currency to continue strengthening, supported by strong exports and seasonal year-end conversion of dollar receipts by Chinese companies.Also Read | Global Market Today: Asian stocks, bonds gain as oil extends decline
The yuan’s recent strength has also reflected a shift in its relationship with US-China yield differentials. Lynn Song, ING’s chief economist for Greater China, said the yuan had become less closely correlated with those spreads over the past year.
Song attributed the shift to the large foreign-exchange holdings accumulated by Chinese exporters in recent years and changing expectations for yuan appreciation. Companies may also be less willing to pursue higher foreign-currency yields if they expect currency gains to offset those returns, she said.
However, a more hawkish Federal Reserve could eventually widen US-China yield spreads enough to attract investors back to dollar assets and create renewed depreciation pressure on the yuan, Song said.
Bank of America also flagged China’s deflationary risks as a potential source of downward pressure on the currency. While weak domestic demand can help sustain China’s current-account surplus, the bank said it could also increase debt-deflation risks and potentially trigger capital outflows during periods of financial stress, as per the report by Reuters.