HONG KONG, June 20 (Reuters) - The yuan rallied on Thursday to its strongest in five weeks on broad dollar weakness after the U.S. Federal Reserve signalled it could cut rates as early as next month to bolster its economy.
The Fed's dovish remarks after its policy meeting on Wednesday reinforced market expectations it was ready to battle growing global and domestic economic risks with interest rate cuts as it considers the impact of rising trade tensions and growing concerns about weak inflation.
The news cheered Asian markets but pushed down U.S. dollar and Treasury yields. The global dollar index .DXY stood at 96.899 as of 0429 GMT, the lowest in a week and down more than 0.2% from the previous close of 97.117. FRX/
Broad dollar weakness helped send the onshore yuan CNY=CFXS to 6.8734 per dollar, its strongest since May 16. It was up 299 pips from the previous late session close and 0.1 percent firmer than the midpoint, which was set at 6.8805 per dollar prior to market open by the People's Bank of China.
Offshore yuan CNH=D3 tracked the rally, trading at 6.8721, a level not seen since May 10.
A Hong Kong-based FX and fixed income trader noted that broader dollar weakness has lifted various asset classes across the region, with the yuan as one of its beneficiaries.
"Everything is rallying today. The market is getting out of short positions," he said.
But the yuan could firm further, he added, noting that Chinese exporters would repatriate their proceeds once Beijing and Washington return to trade talks, reducing the risk of the currency breaking the psychological level of 7 per dollar.
"That is going to be added to renminbi demand, at the same time as offshore interest in Chinese stocks rises, with stronger bond market inflows," said the trader, who sees a 2%-3% yuan rally between now and the end of the month.
An FX sales banker in Hong Kong also attributed Thursday's yuan strength to a softer dollar. "Flows in CNH have been very light today. The focus is predominantly on U.S. Dollar," he said.
But he reckoned the yuan rally could fizzle out after the G20 summit next week, where the Chinese and U.S. leaders will meet over their trade dispute. "My view is that the G20 won't yield a lot of result, confirmation of that could yield a bit of negative sentiment."
Chinese state media said on Thursday that upcoming trade talks between U.S. President Donald Trump and Chinese President Xi Jinping at the G20 Summit are unlikely to immediately resolve major disagreements between the two sides but could start a new phase in negotiations.
U.S. Trade Representative Robert Lighthizer said on Wednesday he will confer with his Chinese counterpart in the Sino-U.S. trade talks, Vice Premier Liu He, before next week's meeting.
The yuan market at 4:29AM GMT:
PBOC midpoint CNY=SAEC
Spot yuan CNY=CFXS
Divergence from midpoint*
Spot change YTD
Spot change since 2005 revaluation
Thomson Reuters/HKEX CNH index
*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.