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Currencies

Yuan's continued weakness triggers investor jitters

Chinese currency battered by rising US rates and trade war

The yuan's monthly value dropped in October for the seventh consecutive month. (Photo by Akira Kodaka)

HONG KONG -- As the yuan's value approaches the psychologically significant threshold of 7 to the dollar, investors appear torn between expectations for a further depreciation in the currency and hopes for a breakthrough in the U.S.-China trade war.

The yuan's monthly value dropped in October for the seventh consecutive month amid U.S. rate hikes and an economic slowdown in China, as well as investor concerns that Chinese authorities are letting the currency weaken to minimize the impact of the trade war. The yuan's offshore rate reached about 6.98 to the dollar at one point Thursday.

A rapid devaluation of the yuan could trigger capital flight. The People's Bank of China has said it will issue bills for the first time in Hong Kong on Wednesday, immediately after the U.S. midterm elections. Market watchers consider the issuance an attempt to shore up the yuan's value.

U.S. President Donald Trump has repeatedly criticized China for its weak currency, and a further decline in the yuan before the midterms could cause even more tension between the world's two largest economies. The Chinese Communist Party is signaling through Politburo meetings and other tools its seriousness about boosting the economy, in hopes of preventing any dramatic movements in the currency market.

The yuan did recover to about 6.8 to the dollar at one point Friday, after a phone conversation between Trump and Chinese President Xi Jinping that fed speculation the trade war could ease.

Still, "the divergence in American and Chinese monetary policy, which is the main reason for the weakening yuan, remains unchanged," said Kokichiro Mio of NLI Research Institute.

The offshore yuan hit a three-month low in Hong Kong at the end of September, as investors trade the Chinese currency for the Hong Kong dollar and other alternatives. A protracted weakness in the yuan could pull money out of the Chinese stock market as well, and Chinese authorities remain on edge.

"Foreign investors are hesitant to place large sell orders for the yuan, worried that the authorities will intervene in the market," a currency dealer in Hong Kong said.

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