By Saumya Vaishampayan
China's central bank guided the yuan to its highest level against the U.S. dollar in more than a year and a half on Wednesday, following the dollar's overnight slide against global currencies.
The People's Bank of China set the dollar's daily reference rate at 6.4920 yuan, meaning the Chinese currency was at its strongest since May 2016. In recent action the yuan was down 0.1% against the dollar from its value late Tuesday.
The yuan doesn't float freely; instead, the central bank each day fixes a midpoint for dollar-yuan pair and allows trading within 2% above and below that level. The yuan trades more freely offshore.
The PBOC considers the previous day's exchange rate when it calculates the fix, and the dollar suffered a broad selloff overnight. The WSJ Dollar Index, which measures the dollar against a 16-currency basket, was down seven straight trading days through Tuesday--its longest losing streak since February 2014--though it rose slightly during Asian trading hours early Wednesday.
But analysts said there could be another factor behind the yuan's strength: Beijing's desire to quash fears of a yuan depreciation that could spur capital outflows. Such considerations have led to a bias for a stronger yuan in the daily fix in recent weeks, said Eddie Cheung, a foreign-exchange strategist at Standard Chartered in Hong Kong.
A stronger yuan is "good for the story [the Chinese] are telling the world: that everything is stable," said Mr. Cheung.
"It just shows they're still in control," he added.
The yuan rose 6.7% against the U.S. currency in 2017, its biggest annual percentage gain since 2008. Still, the currencies of some of China's regional exporting rivals such as Taiwan and Korea gained more, suggesting China maintained some of its competitive advantage in global trade.
Currency analysts are divided on the likely path of the yuan this year, though few expect a move the size of last year's.
Among the yuan bulls, Standard Chartered foresees one dollar buying 6.45 yuan by the end of 2018, or a 0.9% rise in the yuan from its current value. Commonwealth Bank of Australia expects the dollar to end at 6.35 yuan, a 2.5% increase for the yuan.
Andy Ji, Asian currency and rates strategist at Commonwealth Bank of Australia in Singapore, says his bank's outlook for the yuan is mostly about the U.S. dollar.
"People wouldn't hesitate to sell" the dollar against the yuan in the current soft-dollar environment, he said.
Still, any sign of softness in China's economy--as Beijing continues trying to reduce the country's high levels of borrowing--could encourage officials to goose exports by letting the yuan weaken against the dollar.
In the bearish yuan camp, both Société Générale and Morgan Stanley expect one dollar to buy 6.70 yuan by the end of 2018, or a 2.9% decline in the yuan from its current level.
Write to Saumya Vaishampayan at [email protected]