Global Market: China's Yuan hovers near 3-1/2-year high as trade risks cloud outlook

China's yuan holds near multi-year highs as trade risks and yield gaps cloud its outlook.

The onshore yuan edged higher to 6.6920 per dollar in late-morning trading. Before the market opened, the People's Bank of China set the daily midpoint at 6.7313 per dollar, its strongest level since February 2, 2023.

The dollar index remained close to a one-and-a-half-year high as recent US economic data reduced expectations of another Federal Reserve rate hike this month. Meanwhile, concerns over Europe's debt problems have supported demand for the dollar as a safe-haven currency, adding to pressure on the Chinese currency.

According to Reuters, analysts said the yuan's outlook remains uncertain as supportive domestic fundamentals compete with external risks, including trade protectionism, currency movements, and interest-rate differences between China and the United States.

The yuan has gained about 4% against the dollar so far this year and approximately 9% since late 2024, marking a seven-quarter winning streak.

Resilient Chinese exports and expectations among some Western banks that the currency remains undervalued have helped underpin its appreciation, according to Fan Yongjia, an analyst at COFCO Futures. However, Fan warned that rising trade protectionism and potential changes in external demand for Chinese manufactured goods could interrupt the yuan's upward trajectory.

Trade tensions with Europe remain a particular concern. China and the European Union reached an agreement that could reduce Chinese hybrid-car exports to the bloc by more than half, European Trade Commissioner Maros Sefcovic said on Friday following talks in Beijing. The discussions aimed to address the EU's widening trade deficit with China.

The agreement highlights the growing pressure on Chinese exporters as major trading partners seek to address trade imbalances and protect domestic industries.

The widening yield gap between US and Chinese government bonds is another factor weighing on the yuan, according to China Merchants Futures. Higher relative returns on US assets can support demand for the dollar, potentially limiting the appeal of yuan-denominated investments.

The brokerage said the yuan's gains are not yet underpinned by conditions strong enough to sustain a one-way appreciation trend, particularly with the dollar index remaining above 102. It expects the Chinese currency to fluctuate between 6.65 and 6.75 per dollar, according to Reuters.

While reduced expectations of an imminent US rate hike have provided some support, the yuan's near-term direction will depend on developments in global interest rates, the dollar's performance and the outlook for Chinese exports amid escalating trade restrictions.