Yuan retreats from 6-week top as dollar recovers on Fed outlook

The yuan eased from a six-week high on Thursday, pressured by the greenback which gained from investors seeking safety after the Federal Reserve's bearish economic outlook, and as seasonal corporate demand for foreign currencies continued in China. The onshore yuan traded 0.06% weaker at 7.0667 at midday while the offshore yuan softened 0.21% to 7.0656.

The People's Bank of China set the midpoint rate at 7.0608 per dollar prior to market open, slighty firmer than the Reuters estimate of 7.0684. The Chinese currency was up against strength in the dollar index, which climbed 0.1% to 96.249 and from a three-month trough after the U.S. central bank said it could keep interest rates near zero for years to help its economy recover from the COVID-19 pandemic.

Traders in Shanghai said the yuan will likely mirror dollar movements in the near term in the absence of fresh headlines in the U.S.-China trade conflict. Ties have nosedived in recent months over China's proposed national security law for Hong Kong, among other issues

. "The yuan's uptrend (before Thursday) has more to do with the dollar index's consistently weak trend," analysts at China Construction Bank (Asia) wrote in a note. "But because there has been rising demand for dividend payment recently, the room for the yuan strengthening is relatively limited." One of the traders said dollar demand was strong near 7.05 and 7.06 in recent sessions.

With the dollar dominating direction in the Chinese currency, yuan traders should also keep an eye on the euro which could suppress dollar strength should more stimulus come out of Brussels, said Carie Li, economist at OCBC Wing Hang Bank. The European Union is due to meet this month. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 91.46, firmer than the previous day's 91.42.