Yuan strengthens to fresh high against greenback

BEIJING - The Chinese currency strengthened against the US dollar Thursday to its highest level since May last year, with the dollar losing its luster as a safe haven investment, while experts believe the yuan will move in both ways in future.

The central parity rate of the Chinese renminbi, or the yuan, strengthened 42 basis points to 6.5269 against the US dollar Thursday, according to the China Foreign Exchange Trade System.

In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2 percent from the central parity rate each trading day.

The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.

The yuan has appreciated by 6 percent in cumulative terms against the dollar since the beginning of the year.

The dollar index, which measures the greenback against a basket of six major rivals, fell to 92.227 overnight, as traders were astonished by Fed vice-chair Stanley Fischer's early departure.

Fischer, a veteran central banker who helped set the course for modern monetary policy, said on Wednesday he would step down mid October.

Meanwhile, the market was disappointed when Federal Reserve chair Janet Yellen carefully avoided any discussion of monetary policy in a speech last week.

Lingering concerns over tensions related to the Democratic People's Republic of Korea may limit the dollar's upside versus other major currencies, according to the CITIC Securities.

Experts said the yuan is also supported by a slew of upbeat economic data, which pointed to recent restructuring achievements and provided fresh signs of stabilization for the Chinese economy.

The country's manufacturing PMI has been in positive territory for thirteen consecutive months, with the economy expanding 6.9 percent during the first half of the year.

While the greenback is losing its luster, investors become increasingly confident in the Chinese currency.

"Since the key technology positions [of exchange rates] have been breached, investors who had bought excessive dollars scrambled to stop losses and the demand for exchange settlement is growing," said Li Liuyang with China Merchants Bank.

The Chinese yuan weakened against the US dollar to a six-year low in late 2016, triggering concerns over capital outflows. Market sentiment on the yuan has now changed and a strong yuan is likely to continue, traders said.

Cross-border capital flow has stabilized in the first half, and supply and demand in the forex market has reached the most balanced level in about three years, according to the State Administration of Foreign Exchange (SAFE).

The research team at DBS Bank has predicted that the Chinese currency will appreciate further driven by external factors and upbeat economic data, but due attention must be paid on the two "grey rhinos" -- the Fed's shrinking balance sheet and rate hikes.

The researchers suggested better risk management for yuan assets by keeping a close eye on the impact of the European and American markets, and pointed out a high correlation between the dollar index and the value of yuan.

"From a medium-term perspective, the yuan will not go through a unilateral rally, and the yuan-dollar exchange rate will probably achieve two-way fluctuations with improving flexibility." said Wang Xinjie with Standard Chartered Bank.

China has the world's largest currency reserve, which rose for a sixth month in July to hit $3.1 trillion, increasing $23.9 billion from a month earlier, according to the central bank.

It was the first time since June 2014 that reserves have expanded for six straight months.