The Chinese yuan rose above the psychological level of 7 against the dollar for the first time since September 2024, amid bets that the Chinese central bank will allow a gradual rise in the currency in order to boost market confidence.
The yuan gained 0.2% in offshore trading to reach 6.9964 against the dollar on Thursday. The yuan's move came after the People's Bank of China strengthened the currency's daily reference rate to its strongest level since September 2024.
The yuan is on track for its best annual performance against the dollar in nearly five years, supported by the decline of the US currency, capital inflows seeking to capitalize on the recovery of the Chinese stock market, and easing geopolitical tensions.
Beijing seeks to avoid fluctuations in the Chinese currency.
Over the past few months, Beijing has been guiding the yuan to gradually rise through the daily reference rate mechanism, in an effort to allow the currency to appreciate in a measured way without triggering volatility in the foreign exchange market.
Wang Qing, senior macro economist at Golden Credit Rating, said the yuan has been supported by a weaker dollar and seasonal foreign exchange conversions by exporters. He added that a sustained rise in the yuan will help boost the attractiveness of Chinese capital markets to foreign investors.
In domestic trading, the Chinese currency rose 0.1% to 7.0067 against the dollar on Thursday.
Flows were directed towards selling the dollar, while major Chinese banks were observed buying dollars heavily at levels close to 7.006, according to traders who asked not to be identified because they were not authorized to speak publicly.
Traders said liquidity in overseas markets was thin due to the effects of the holidays. Hong Kong markets will be closed on December 25 and 26 for a public holiday.
The yuan is still undervalued
Despite its rise against the dollar, many believe the yuan is still undervalued on a trade-weighted basis, especially given the entrenched deflationary pressures on prices in China.
Goldman Sachs said the Chinese currency is undervalued by about 25% when compared to China's underlying economic conditions.
Zhao Pengxing, chief strategist at Australia & New Zealand Banking Group, said the yuan is likely to remain strong within a range of 6.95 to 7 against the dollar during the first half of next year.
