Dollar bounces back as China steadies yuan

TOKYO: The dollar and risk-sensitive currencies recovered ground against the yen and the euro on Wednesday after China’s central bank held the yuan steady and better than expected Chinese trade data helped reduce some of bearishness toward the world’s second largest economy.

The yuan and Chinese share markets regained some stability following heavy intervention by Beijing to stem falls in the Chinese currency this week, persuading traders to buy back risk assets.

The dollar index edged up 0.2 percent to 99.192 , extending its recovery from this week’s low of 98.252 set on Monday.

Against the yen, the dollar rose 0.6 percent to 118.30 yen , having pared just about a half of its losses for this year, with a 4 1/2-month low of 116.70 yen hit on Monday.

The euro also eased 0.3 percent to $1.0822, from Monday’s high of $1.0970.

Both the yen and the euro tend to gain at times of market stress because these currencies are often used as funding currencies for investment in risk assets, and consequently rise when there is a retreat from those assets.

“People had been reducing their existing exposure to risk assets. But I think that, or at least the first round of that stage is coming to an end,” said a trader at a North American bank.

The People’s Bank of China set the mid-point for the yuan at 6.5630 to the dollar, virtually unchanged from firm fixes on the previous two days.

The fixing came as the central bank put ae squeeze on offshore sellers of the currency by making it prohibitively expensive to speculate against the yuan in offshore markets, dampening fears of a sustained depreciation.

In addition, customs data also showed China’s exports and imports in December were both better than market expectations.

All of this was good news for the Australian dollar, often used as proxy for China trade because of Australia’s reliance on Chinese demand for raw materials. It jumped 0.7 percent to $0.7032, edging back from Monday’s four-month low of $0.6927.

While Beijing appears to have stabilised the yuan for now, market players say its long-term policy outlook remains unclear.

“When the yuan was accepted as reserve currency for the IMF, they were asked to liberalise the market. And in the long run, that is what they are likely to be heading for. What they have been doing in recent days is the opposite,” said Kyosuke Suzuki, director of forex at Societe Generale.

“In addition, there’s question of how long they can keep up massive market intervention,” he added.

Some market players think speculators were ready to sell the yuan again as soon as Beijing stops intervening.

“Chinese authorities have overpowered markets for now. But as soon as they stop doing so, I suspect markets will start trying to test their resolve,” said Masatoshi Omata, senior client manager of market trading at Resona Bank.

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