Central bank sets central parity rate higher after greenback retreats
The central parity rate of the yuan on Monday rose by the largest amount since November 9 after a central bank official voiced support for the currency.
The yuan strengthened 126 basis points against the U.S. dollar in early trading on Monday to 6.9042, according to the China Foreign Exchange Trade System. On Friday, the yuan had fallen to its lowest rate against the U.S. dollar since June 2008.
In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.
"The change on Monday could be read as tactical revision," said Dong Dengxin, director of the Financial Securities Institute at Wuhan University of Science and Technology.
"The yuan has been falling continuously for some time, and some believe the target is 7 yuan a dollar. It could be that some market participants decided it was time for a tactical rebound before the target is reached," Dong told the Global Times Monday.
The yuan's exchange rate will continue to be kept basically stable at a reasonable and balanced level, Yi Gang, deputy governor of the People's Bank of China, the central bank, said in an exclusive interview with the Xinhua News Agency on Sunday.
Yi said the recent appreciation of the U.S. dollar reflected the acceleration of U.S. economic growth, stronger expectations for inflation, and signs that the U.S. Federal Reserve will raise interest rates at a faster pace in the future.
The yuan's fluctuations against the U.S. dollar have widened of late, Yi said, due to external factors such as Donald Trump's victory in the U.S. presidential election, the UK referendum to leave the EU and Egypt's decision to let its currency float freely.
These factors caused capital to flow back to the U.S., lighting a fire under the Dollar index and the U.S. stock market, causing global currencies to weaken against the greenback.
Among them, Yi pointed out, the yuan is still showing the traits of a stable and strong currency.
Since October, the Japanese yen, the euro and the Swiss Franc weakened against the dollar by 10.5 percent, 5.8 percent, and 4.2 percent, respectively.
Among emerging economies, the Malaysian ringgit, the South Korean won, the Mexican peso weakened against the dollar by 7.2 percent, 6.5 percent, and 6.1 percent, respectively.
By comparison, the yuan weakened by 3.5 percent against the dollar, and the percentage is less than half of the gain in the Dollar index.
Since October, the yuan has strengthened against several currencies. For example, it strengthened by 7.5 percent against the yen.
China has always emphasized that the value of the yuan should be gauged against a basket of currencies, Yi said, noting that the country's foreign exchange reserves, though declining, remain ample.