With the Iran war truce easing some geopolitical tensions, the Chinese yuan extended its gains to hit the highest level in about three years. The move is seen as the result of a combination of factors, including a weaker dollar, revived risk appetite, and rising expectations for China's economy.
On the 9th, according to China Business News, the onshore dollar-yuan rate closed at 6.8274 yuan the previous day, up 323 points from the prior session to the lowest since Feb. 2023, while the offshore rate fell intraday to 6.8215 yuan, the lowest since Apr. 2023. A drop in the dollar-yuan exchange rate means the yuan is strengthening.
The immediate backdrop for the yuan's strength is seen as the easing of geopolitical risk following the Iran war truce. As expectations for stability in the Middle East spread, demand for the safe-haven dollar fell and risk appetite revived, analysts said. In fact, the dollar index, which reflects the dollar's value against six major currencies, fell below 99 the previous day, showing weakness. A dollar index at 100 or above indicates dollar strength, and below that indicates weakness.
Lin Song, an economist at ING Bank, said, "The yuan remained resilient against other currency even during the war," and added, "After the truce news, dollar selling intensified and the yuan rally resumed." Lin also suggested that by year-end the dollar-yuan rate could approach the 6.7 yuan level. Bloomberg reported that the yuan has risen more than 2% so far this year, standing out among major Asian currency.
Domestic factors also supported the yuan's strength. Fang Ming, a researcher at the National Finance and Development Laboratory, cited "market confidence in the recovery of consumption and investment" as the reason for the yuan's short-term gains. With expectations building that China's key first-quarter economic indicators to be released on the 16th will come in better than market forecasts, projections are that consumption and investment will recover year over year in China this year, prompting an inflow of short-term funds into the market and boosting demand for the yuan.
There are seasonal factors as well. In April, as exporters concentrated their demand to exchange dollars into yuan after the first-quarter settlement of account, it fueled the yuan's strength. In addition, once the 6.9 yuan level broke, a "let's exchange before it falls further" mindset spread among those who had delayed exchanging in hopes of a rebound, further stoking yuan demand, Fang explained.
Policy signals also affected the market. The dollar-yuan central parity rate set by the People's Bank of China the previous day was 6.868 yuan, the lowest since Apr. 2023. The market interprets this as the authorities allowing some further yuan strength. However, the authorities are drawing a line against unidirectional appreciation. At a press conference last month, People's Bank of China Governor Pan Gongsheng said, "China neither needs nor intends to secure trade competitiveness through the exchange rate."