On the 25th, the offshore yuan broke through 7 per dollar, sending the yuan's value to its strongest level in 15 months. The move stemmed from a weaker dollar on softer U.S. economic data and foreign capital inflows into China's capital markets.
According to Bloomberg, the offshore yuan traded outside China fell 0.2% from the previous session to as strong as 6.9964 per dollar. 7 per dollar is the so‑called "psychological threshold." It is the first time the yuan has strengthened beyond 7 per dollar since September last year.
The onshore yuan traded on the Shanghai foreign exchange market also strengthened, reaching 7.0067 per dollar. The yuan has risen about 4% against the dollar this year and appears on track for its best performance in five years.
Expectations for Federal Reserve rate cuts underpin the yuan's surge. As U.S. labor indicators such as the unemployment rate remained weak, markets judged the Fed is likely to lower rates. As a result, the dollar index fell, lifting the value of non‑dollar currencies including the yuan across the board. With the Donald Trump presidency ahead, a partial easing of geopolitical tensions also supported the exchange rate.
Improving domestic economic conditions in China added support. As Chinese stocks rebounded, foreign funds flowed in, and global investors have been steadily increasing their holdings of Chinese Government Bonds. Wang Qing, chief macro analyst at Golden Credit Rating, told Bloomberg, "Along with dollar weakness, seasonal demand from exporters to convert their dollar holdings into yuan at year‑end has joined in," adding, "If yuan strength continues, China's capital markets will become even more attractive."
The People's Bank of China, the Central Bank, also unusually set its daily fixing to allow a stronger yuan. The bank set the fixing at the strongest in 15 months, aligning with market moves. The step is seen as an attempt to restore market confidence by curbing excessive volatility while allowing a gradual rise in the yuan's value. At the recently concluded Central Economic Work Conference, China's financial authorities set a policy to keep the yuan basically stable at a reasonable and balanced level.
Foreign media and experts say the yuan remains undervalued. Goldman Sachs assessed the yuan is currently undervalued by about 25% relative to China's economic fundamentals. Zhao Pengxing, chief strategist at Australia and New Zealand Banking Group (ANZ), said, "In the first half of next year, the yuan is likely to trade in a 6.95–7.0 per dollar range and maintain its strength."
Experts expect a virtuous cycle in which economic fundamentals and the exchange rate support each other as market confidence in yuan assets firms up. Yi Bin, Spokesperson for the State Administration of Foreign Exchange of China, said, "China's foreign trade and investment remain resilient, and cross‑border capital flows are stable," adding, "foreign exchange market transactions are proceeding in an orderly manner."