SHANGHAI: China's yuan slipped to a near three-week low against the dollar on Friday and was heading for a second straight weekly loss, as the intensifying Middle East conflict fuelled safe-haven demand for the greenback and pressured non-dollar currencies.
With no end in sight to the war, investors turned firmly risk-averse. The Nasdaq slid more than 2% overnight to confirm it was in correction territory, while Brent crude surged past $105 a barrel, underscoring heightened nerves across global markets.
U.S. President Donald Trump said he will extend a pause on attacks against Iran's energy plants into April and that talks with Iran were going "very well," but an Iranian official pushed back, dismissing the U.S. proposal as "one-sided and unfair."
"Stability re-emerges as the top priority for the People's Bank of China's (PBOC) exchange rate policy, in our view," Citi analysts said in a note.
"Global uncertainties are elevated with the conflict, oil prices, U.S. dollar, and other variables... Elevated uncertainties could lead the PBOC to refocus on stability, as what has happened amid the tariff shocks last year."
They noted that the central bank has been holding the daily fixing close to 6.9 per dollar level this month as it takes "a wait-and-see mode as external uncertainties evolve."
Prior to the market's opening on Friday, the PBOC set the midpoint at 6.9141 per dollar, the weakest fix since March 9, and 52 pips softer than a Reuters estimate of 6.9089.
In the spot market, the onshore yuan slipped to a trough of 6.9163 per dollar, also the weakest level since March 9, before changing hands at 6.9133 as of 0255 GMT.
If it finishes the late night session at the midday level, it would have lost 0.12% against the dollar for the week, booking the second consecutive weekly drop.
Its offshore counterpart last fetched 6.9175 per dollar. Despite the slight weakness, the Chinese currency remains one of the best performing emerging market currencies since the Iran war broke out in late February.
However, some analysts and traders expect seasonal demand for foreign exchange to kick in and drag the yuan down soon, as overseas-listed Chinese companies gradually access more foreign exchange to make dividend payments to their shareholders. Such conversions usually add downside pressure on the yuan.
The yuan traditionally trends weaker from April through August, analysts at China Construction Bank said in a note, due largely to "a seasonal increase in corporate foreign exchange purchases and rising demand for foreign exchange among households reflected in a widening in service trade deficit," reflecting a travel rush in summer.
Separately, market participants took stronger profit growth at industrial firms in stride, and some traders said they will pay close attention to March manufacturing activity data due next Tuesday for more clues on the impact on the broad economy from the Middle East war. - Reuters
