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Yuan falls to 26-month low, furthest from guidance since 2019

Expected U.S. interest rate hike sends currency to 7.0535 per dollar in China

The yuan has come under pressure with several overseas central banks expected to double down on hawkish monetary policy this week to tame high inflation.   © Reuters

SHANGHAI (Reuters) -- China's yuan ended at an over 26-month low against a rising dollar on Wednesday and its deviation from official guidance was at the currency's widest since the height of Sino-U.S. trade tensions in 2019.

The yuan has come under pressure with several overseas central banks expected to double down on hawkish monetary policy this week to tame high inflation. The U.S. Federal Reserve is widely expected to deliver another 75-basis-point interest rate rise later in the day. 

The onshore yuan finished the domestic trading session at 7.0535 per dollar, the weakest such close since July 3, 2020. It was 359 pips, or 0.5%, weaker than the previous late night close of 7.0176.

Its offshore counterpart followed suit and weakened past 7.06 per dollar for the first time since July 2020. It traded at 7.0617 around 0830 GMT.

The Fed's monetary tightening trajectory could affect the policy decisions of its global peers and major currencies. Its widening divergence with the Chinese central bank, which has kept rates low, has piled particular pressure on the yuan.

Before the market opened, the PBOC set a firmer-than-expected official midpoint fixing to slow the yuan's decline.

The guidance was set at 6.9536 per dollar, 68 pips weaker than the previous fix of 6.9468, the softest since Aug. 12, 2020.

"As the gap between the spot and fix is widened, we anticipate depreciation pressure could increase should the spot reach the upper bound of the trading band," analysts at Maybank said in a note.

The gap between the onshore yuan and the official midpoint stood at 999 pips as of domestic close, the widest since August 2019.

The spot yuan rate is only allowed to trade in a narrow 2% range around the daily midpoint, and Wednesday's guidance kept the range to between 6.8145 and 7.0927.

Geopolitical tensions piled more pressure on the yuan, as market sentiment was hurt by Russian President Vladimir Putin's announcement of a partial military mobilization. 

Some currency traders said the yuan weakness may persist for the time being as the Fed looks set to continue on its hawkish path, while some expect China's central bank to roll out fresh policy measures to stem the rapid yuan loss. 

"Markets will closely watch the Fed remarks after the rate decision for more clues on the future trajectory," said a trader at a foreign bank.

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