Updates closing price
SHANGHAI, March 4 (Reuters) - China's yuan finished domestic trading at a six-week high against the dollar on Wednesday after an emergency rate cut by the U.S. Federal Reserve sent the greenback skidding.
The yuan CNY=CFXS ended onshore trading at 6.9331 per dollar, up more than 0.6% on the day and its strongest close since Jan. 23, when China's coronavirus outbreak began to escalate and authorities announced strict containment measures.
If the yuan can hold the gains through the late night close, it will book its best session since June 2019. The late session ends at 11:30 p.m. (1530 GMT).
The Fed slashed its policy rate overnight in a bid to cushion the world's largest economy from the coronavirus epidemic, but the surprise move only added to U.S. financial market worries about a deeper, lasting slowdown.
The People's Bank of China (PBOC), which has been steadily easing policy for weeks in response to the outbreak, kept its short-term borrowing costs steady on Wednesday. But analysts are expecting it to announce more support measures soon as businesses struggle to return to normal operation.
Prior to the market opening on Wednesday, the PBOC set the midpoint rate CNY=PBOC at 6.9514 per dollar, 2 pips firmer than the previous fix of 6.9516.
The yuan has now recovered all the losses it made since the Lunar New Year holiday, when Wuhan, the epicentre of the virus outbreak, issued an official notice to lock down the city on Jan.23 to contain its spread. Tough restrictions on travel and quarantines soon went into place across much of the country.
While the number of new cases in China has been dropping, officials warn it is too early to relax. Economic activity is only slowly recovering from the shock, and the rapid spread of the virus in other countries is fuelling fears of a global recession.
Becky Liu, China macro strategist at Standard Chartered Bank, said the PBOC was likely to ease policy soon to prevent the yuan from appreciating too fast. The Fed is widely expected to cut rates again soon if the virus continues to spread.
"As the U.S. rate cut may suggest the start of an coordinated move by the G7 central banks, China will likely to cut rates faster to prevent a further strengthening of the yuan...," Liu said in a note.
China's official manufacturing activity gauge plunged to a record low in February and the services sector also contracted by the most ever, prompting some analysts to forecast the economy would shrink this quarter, the first time since at least the 1990s.
Many traders and analysts expect the central bank to again lower the amount of cash that banks must hold as reserves this month and to cut its benchmark deposit rate for the first time since 2015, giving banks more room to lend without squeezing their profit margins.
The PBOC has injected large amounts of liquidity since late January and cut a number of key rates. It has also urged banks to offer cheap loans to businesses which have been worst hit by the crisis, and has told lenders to be tolerant if borrowers are late with loan payments.
Separately, the widened yield gap between China and the United States also pushed forwards higher. One-year onshore dollar/yuan swap points CNY1Y= surged to the highest level since March 2018.
The global dollar index =USD traded at 97.176 as of 0850 GMT, when the offshore yuan CNH=D3 was changing hands at 6.9283 per dollar.
(Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim Coghill)
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