China’s yuan eases on hawkish Fed, warning of depreciation pressure

SHANGHAI, Jan 6 (Reuters) – China’s yuan eased against the dollar on Thursday, dragged lower by investor worries over capital outflow risks and depreciation pressure after the Federal Reserve indicated it would tighten monetary policy at a faster pace than markets had expected.

Fed policymakers said at their December meeting that the U.S. labor market was “very tight” and the central bank may need to not just raise interest rates sooner than expected but also reduce its overall asset holdings to tame high inflation, according to minutes of the Dec. 14-15 policy meeting. read more

Fed tightening could affect global fund flows, boosting the dollar and piling pressure on emerging market currencies, traders said.

Prior to the market opening, the People’s Bank of China (PBOC) set the midpoint rate at 6.3728 per dollar, 51 pips firmer than the previous fix 6.3779.

In the spot market, the onshore yuan opened at 6.3711 per dollar and was changing hands at 6.3742 at midday, 95 pips weaker than the previous late session close.

“The expectation of the Fed’s tightening trajectory is likely to dominate the dollar’s movements,” China Construction Bank said in a note.

“The looming interest rate hikes will lift the short-end dollar rates and likely drive the dollar index higher. With the impact of seasonal FX settlement fading, monetary policy divergence between China and the United States is likely to put some downside pressure…