Yuan on Verge of Five-Year Low as Fed Concern, Economy Take Toll

The yuan drew close to eclipsing the lows reached during January’s turmoil as factory data failed to damp concern about the economic outlook and speculation mounted that the Federal Reserve is preparing to raise interest rates.

The Chinese currency fell 0.05 percent to 6.5815 a dollar as of 5:11 p.m. in Shanghai, about 0.2 percent away from its five-year low in January. The exchange rate dropped as much as 0.25 percent on Wednesday, but pulled back amid talk of state support as well as a surge in the euro.

Manufacturing gauges released Wednesday showed activity remained subdued in May, after April economic data trailed estimates. Investors are now predicting a 53 percent chance the Fed will raise interest rates at its July meeting, up from 26 percent a month ago. The U.S. and China will hold their annual economic meeting next week.

“Today’s PMI reports and the recent dollar strength both point to further weakening pressure on the yuan,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. “The People’s Bank of China may also want to let the currency follow market forces to weaken ahead of the U.S.-China economic dialogue later this month.”

The yuan rallied as much as 0.18 percent during a 35-minute period in the late afternoon, spurring speculation that state-run lenders were supporting the currency. The rebound was helped by manufacturing data that lifted the euro, which has a 21.4 percent share in a trade-weighted index tracked by the People’s Bank of China.

“Judging from the trading data, it looks like some major Chinese banks were selling the dollar to support the yuan,” said Iris Pang, senior economist for greater China at Natixis SA in Hong Kong. “At the same time, the euro strengthened after the release of PMI data in the area, lifting major foreign currencies."

The yuan’s retreat saw another pause earlier in the afternoon, with a one-minute spike.

“There’s a possibility of a fat finger trade, but it won’t alter the overall near-term trend in the market which points to yuan depreciation given the strength in the greenback,” said Jiang Shu, chief gold and foreign-exchange analyst with the financial holding unit of Shandong Gold Group. “Its impact at most will be some loss and gain between the trader and counterparties."

Foreign Reserves

The yuan’s losses come amid signs the nation’s authorities are more comfortable letting the yuan weaken. The nation’s foreign reserves increased by a combined $17 billion in March and April, a sign that the central bank is spending less on intervention after the currency hoard shrank by $599 billion in the previous 12 months. Estimated capital outflows moderated to about $44 billion in March, the latest figures available, from $144 billion in January.

The end of a temporary sweet spot that China enjoyed with its exchange rate -- strength versus the dollar and weakness against trading partners -- will spur renewed capital outflows, Goldman Sachs Group Inc. said last week.