Yuan Scales Four-Year Peak as Traders Look Past US Rate Hike

China's offshore yuan climbed to its strongest level against the dollar in four years on Friday, with traders betting that this week's US rate increase has not broken the currency's appreciation cycle.

The offshore unit touched 6.6956 per dollar in morning trade, a level last seen in July 2022. Onshore, the yuan traded at 6.6983 per dollar in late morning, its strongest since January 2023, after strengthening about 0.15% and staying on course for a third consecutive weekly gain.

Market attention is now fixed on next week's meeting between US President Donald Trump and Chinese leader Xi Jinping, which could ease some trade tensions.

Bank of America expects the yuan to gain a further 1.6% by the end of this year. The bank pointed to conversion of export proceeds and an undervalued onshore yuan as the main drivers, along with growing pressure from the G7 to address trade imbalances.

The dollar index had risen earlier in the week before Wednesday's rate hike by the US Federal Reserve, but that rally faded on Friday. Nanhua Futures said that while the US has entered a rate-hike cycle, the yuan's appreciation path has not ended, and projected continued strength on the back of China's strong exports and year-end settlement of dollar receipts.

Lynn Song, ING's Greater China chief economist, said the yuan's trajectory has decoupled over the past year from its usual close correlation with US-China yield spreads. She attributed this largely to the large amounts of foreign exchange held by Chinese exporters in recent years and a shift toward expectations of yuan appreciation, adding that fewer companies are willing to chase the yield spread for fear of losing out on currency moves.

Song cautioned, however, that a more hawkish Fed could eventually widen yield spreads enough to draw investors back and put depreciation pressure on the yuan. Bank of America flagged China's deflationary risks as another possible drag, noting that weak domestic demand keeps the current account surplus high but also carries debt-deflation risks that could trigger capital outflows under stress.