SHANGHAI: China's yuan edged higher to a fresh 33-month high against the U.S. dollar on Monday, after a report that regulators have advised financial institutions to curb their U.S. Treasury exposure, while the greenback weakened on rate cut expectations.
Chinese regulators have asked financial institutions to rein in their holdings of U.S. Treasuries and instructed those with high exposure to pare down their positions due to concern over concentration risk and market volatility, Bloomberg News reported, citing unnamed sources.
The onshore yuan strengthened to as much as 6.9284 per dollar, the strongest level since May 11, 2023.
"News about China urging banks to curb U.S. Treasuries exposure pushed spot a tad lower," analysts at UBS said in a note, referring to the dollar versus the yuan.
"The move is framed around diversifying market risk, rather than anything to do with geopolitical manoeuvring or a fundamental loss of confidence in U.S. creditworthiness," they added.
Sentiment was also aided by a stronger guidance rate and data showing China's foreign exchange reserves rose more than expected in January.
The yuan has gained for 11 straight weeks in its longest winning streak since early 2013, helped by dollar weakness, China's resilient exports and the growing appeal of China's capital markets.
"Improved sentiment on China's growth outlook, greater policy tolerance for CNY strength, and significant FX undervaluation has reinforced expectations for further CNY appreciation," Goldman Sachs said in a report, using the yuan's official name.
Prior to the market's open on Monday, the People's Bank of China set the midpoint rate - around which the yuan is allowed to trade in a maximum 2% band - at 6.9523 per dollar, the strongest since May 16, 2023.
The dollar index dipped 0.1% in Asian trade on Monday, following Friday's 0.3% drop, as a two-week rebound lost steam.
San Francisco Federal Reserve President Mary Daly said on Friday she thinks one or two more interest rate cuts may be needed to counteract weakness in the U.S. labour market. Lower rates could reduce the greenback's appeal.
Traders were also encouraged by official data showing China's foreign exchange reserves, the world's largest, rose to $3.399 trillion last month, exceeding the $3.372 trillion forecast in a Reuters poll.
Goldman expects the yuan to appreciate gradually, strengthening to 6.7 per dollar in 12 months.
"The macro impact of currency strength is likely moderating over time," the Wall Street bank said, citing China's shift toward higher-tech and higher value-added exports, and Chinese exporters' embrace of forex hedging tools. - Reuters
