Dollar tenses for yuan fix as China eases policy

The dollar got off to a tense start on Monday as investors waited to see if China would follow an easing in domestic policy by allowing its yuan to fall, a step that would likely pile fresh pressure on emerging currencies.

Early moves were limited with Japan on holiday and the U.S. bond market on a break. A sudden and steep rise in Treasury yields had underpinned the dollar for much of last week.

China’s central bank on Sunday moved to support the economy by slashing the level of cash that banks must hold as reserves, injecting a net 750 billion yuan ($109 billion) into the financial system.

It was the fourth reserve requirement cut this year and comes as the economy fights the drag from an escalating trade dispute with the United States.

Now analysts were anxious to see if Beijing would also allow the yuan to fall sharply at its morning fixing, the first after a week-long holiday.

“China’s central bank, cut the reserve requirement ratio for some lenders by 1 percentage point, thereby increasing support for lending,” noted analysts at Australia’s St. George Bank.

“Interestingly, it also added that the cut would not put depreciation pressures on the currency, suggesting authorities hope to limit downward pressure on the yuan.”

Any drop in the yuan tends to undermine other emerging currencies as they need to depreciate to keep exports competitive. That in turn supports the safe-haven yen and the dollar, particularly when U.S. yields are rising.

Yields on 10-year Treasuries hit a seven-year peak on Friday as data showed the unemployment rate falling to its lowest since 1969.

“The employment report does not offer any reason to think the labour market is losing any momentum,” Kevin Cummins, a senior U.S. economist at NatWest Markets.

“As a result, the Federal Reserve’s plan for gradual rate hikes through year end and beyond should remain largely intact.”

Against a basket of currencies, the dollar was steady at 95.621 after hitting a six-week top at 96.121 last week.

The dollar was holding at 113.70 yen after topping out at 114.55 last week, the highest since November last year. Chart resistance around 114.70/75 remains a major barrier.

The euro hovered at $1.1525, having bounced only modestly from its recent six-week trough at $1.1462.

Italian politics remained a drag as the European Commission warned the country’s budget deficit breached past commitments, leading Rome to insist it would “not retreat” from its spending plans.

Sterling edged up to $1.3126 amid speculation Britain was moving nearer to an exit deal with the European Union.

EU Brexit negotiators believe a deal with Britain on leaving the bloc is “very close”, sources said, in a sign a compromise on a major sticking point – the future Irish border – might be in the making.

Brazil’s real was a shade firmer at 3.8364 per dollar after exit polls in the Presidential election suggested right-wing Congressman Jair Bolsonaro was headed toward a second-round runoff against leftist Fernando Haddad.

Source: Reuters