Yuan Fell Against the Dollar Due to a Combination of Factors

China’s yuan suffered losses against the U.S. dollar. The yuan fell to a one-week low against the greenback on Wednesday, as widening monetary policy divergence with other major economies undermined the country’s yield advantage and triggered some investor concern of capital outflow risks.

On Wednesday, the yield gap between the country’s benchmark 10-year government bonds and their U.S. counterparts fell to 42 basis points, the lowest since February 2019. The yield gap shrunk to 42 basis points, as Powell hinted at a more aggressive monetary tightening in the U.S. 

Prior to the market’s opening, the central bank set the midpoint rate at 6.3558 per dollar. 

In the spot market, the onshore yuan opened at 6.3650 on Wednesday. However, it declined to as low as 6.3750, the worst result since March 15. By midday, the onshore yuan was changing hands at 6.3684, 24 pips weaker than the previous late session close.

Yuan and the Covid-19 pandemic

According to several currency traders, a recent resurgence of Covid-19 with record-high infections in China could disrupt the broad economy and pressure financial markets.

Authorities in China are trying to cope with the pandemic. The country has sent inspection teams to 10 provinces to implement swift containment measures as the countrywide Covid-19 surge driven by the Omicron variant shows no sign of slowing.

Last week, President Xi Jinping called on officials to make Covid-19 control their top priority. He pledged accountability and severe punishment for those whose dereliction of duty leads to outbreaks getting out of control.

On Wednesday, China reported 2,600 confirmed cases and 2,350 asymptomatic infections. 

Vice-Premier Sun Chunlan, who is in charge of health, asked local governments to follow epidemic control. As local authorities feel the heat, authorities are acting swiftly to tackle outbreaks with lockdowns, travel restrictions, etc.