Yuan Grinds Toward 7 Per Dollar as PBOC Works to Manage Gains

The yuan is inching close to a key psychological level of 7 per dollar, reflecting optimism over improved US-China relations but the gradual appreciation shows Beijing is tightly managing its gains.

China’s onshore yuan edged up to 7.0613 per dollar on Wednesday, its strongest level in more than a year. Its gains have been fueled by the People’s Bank of China strengthening its reference rate for the currency with its so-called fixing on Wednesday at the strongest since October last year .

Yet, there are also signs that the PBOC may be controlling the pace of currency appreciation as it seeks to drive up domestic demand while maintaining the competitiveness of the nation’s exports. The yuan nearing the also threatens to spur local firms to sell their massive dollar holdings, which could threaten market stability.

For one, the PBOC has been setting its daily yuan fixings at levels weaker than market estimates in recent sessions, signaling its weakening bias for the currency. Moreover, state-owned banks have been buying dollars from time to time to slow the yuan’s rally, according to traders who asked not to be named as they are not authorized to speak publicly.

“Policymakers in China are clearly showing their comfort with a stronger yuan,” Citigroup Inc. strategists Rohit Garg and Gordon Goh wrote in a note. However, the weaker-than-expected fixings “should be interpreted as the PBOC wanting a controlled yuan appreciation,” they wrote.

Beyond PBOC’s managed approach, the yuan is headed for its best year since 2020 in both onshore and offshore markets as easing trade tensions between Washington and Beijing helped drive inflows into Chinese stocks. Dollar weakness spurred by US fiscal concerns has also favored the yuan.

The momentum behind the yuan has grown following an unexpected between US President Donald Trump and his Chinese counterpart Xi Jinping and a potential Trump to China next year. Offshore traders are betting on further yuan gains.

Hedge funds have sold dollars against the offshore yuan in the cash market and made trades in the option market that benefit from declines in the dollar-yuan currency pair, according to traders.

Despite this momentum, market watchers including those at Oversea-Chinese Banking Corp. expect the PBOC to prioritize the currency’s stability to support the economy.

“The renminbi is expected to continue appreciating in a measured, policy-guided manner,” OCBC strategists Frances Cheung and Christopher Wong wrote in a note.