China's yuan dips to 7-month low on lack of stimulus news, dollar strength

China's yuan weakened to a seven-month low against the dollar on Wednesday (21 June), as disappointment over a lack of stimulus to revive the country's faltering economy and broad dollar strength weighed on the currency.

The offshore yuan weakened past 7.2 per dollar in early trade, a level not seen since late November 2022. The fall came ahead of two days of public holidays in China when the onshore market closes for the Dragon boat festival.

The drop came shortly after the central bank set the midpoint rate <CNY=PBOC> at 7.1795 per US dollar prior to market opening, weaker than the previous fix of 7.1596 and market expectations.

Spot yuan <CNY=CFXS> opened at 7.1870 per dollar and was changing hands at 7.1926 at midday, 105 pips weaker than the previous late session close and 0.18% weaker than the midpoint.

The spot rate is allowed to trade with a range of 2% above or below the official fixing on any given day.

China cut its benchmark loan prime rates (LPR) for the first time in 10 months on Tuesday, trimming them by 10 basis points as authorities seek to shore up a slowing recovery.

But modest interest rate cuts alone will have limited impact in stimulating weak household demand without fiscal support measures, analysts said.

Moreover, the central bank's recent move to cut rates has further widened the interest rate differential between the US and China, which weighs on the yuan.

"Interest rate cuts won't turn the economy around, as the problem lies in demand from household and business as people and companies just don't want to currency," said Alvin Tan, head of Asia currency strategy for RBS Capital Markets.

There is "a palpable unease in the market" over the timing of when more fiscal measures will materialise, he said.

China's cabinet met on Friday to discuss measures to spur growth in the economy, state media reported, pledging to roll out policy steps in a timely way.

The global dollar index <.DXY> rose to 102.587 from the previous close of 102.54., after US housing data for May showed the largest monthly jump in over three decades.

Investors are also awaiting US Federal Reserve Chair Jerome Powell's two-day testimony before Congress on Wednesday, which will be scrutinised for clues regarding how long the central bank will keep its restrictive policy in place, which has supported the dollar.

The offshore yuan <CNH=D3> was trading 0.06% weaker than the onshore spot at 7.1968 per dollar around mid-day.

The one-year forward value for the offshore yuan <CNH1YOR=> traded at 6.9895 per dollar, indicating a roughly 2.97% appreciation within 12 months.