The dollar fell against a basket of major currencies on Tuesday after China lifted its official yuan exchange rate to its highest level in 30 months, helping support demand for other currencies.
China’s central bank set the official yuan midpoint at 6.4760 per dollar before the market opened, up % from the previous fix, also the biggest change since 2005.
In the offshore market, the yuan strengthened as far as 6.4419 for the first time since June 2018. It started the week at 6.4944.
“If the Chinese currency is going up, it’s providing a degree of support for Asian currencies in general, and I suspect that’s why the U.S. dollar is partially reversing the gains that we saw from Wall Street time,” said Ray Attrill, head of FX strategy at National Australia Bank in Sydney.
“It’s a very big move by any historical yardstick, and I don’t think you can ignore that.”
While investor caution about the yuan’s rally prompted some later selling of the Chinese currency on Tuesday, the PBOC’s action nonetheless lifted risk sentiment in currency markets.
Among G10 currencies, the Australian dollar led gains as the move by the People’s Bank of China (PBOC) encouraged broad dollar selling.
The dollar index weakened 0.2% to 89.731. It dropped as low as 89.415 on Monday for the first time since April 2018, but ended the day with a 0.1% gain after U.S. stocks slid.
Earlier, the dollar had found support as concern about surging COVID-19 cases and uncertainty about U.S. runoff elections in Georgia spurred a retreat in U.S. stocks from record highs to start the year and kindled demand for safer assets.
Still, strategists appear convinced of protracted weakness for the dollar.
“While rising COVID cases remain the key near-term risk, as has been the case in the latter part of 2020, the market continues to focus on the prospects of the vaccine and the eventual global economic recovery,” ING Bank said in a note to clients.
“While a possible Democratic victory (in Georgia) could raise concerns about more regulation, at least over the coming months this might be outweighed by expectations of larger fiscal stimulus and thus keep risk assets supported and the dollar weak over the coming months.”
The Aussie dollar, a barometer of risk appetite that also tends to follow the yuan, jumped 0.7% to 77.18 U.S. cents during trade in London, approaching the 2-1/2-year high of 77.43 touched on the final day of 2020.
The dollar fell 0.3% to 102.86 yen. It dropped as low as 102.715 on Monday for the first time since March.
The euro rose 0.2% to $1.22765 after reaching $1.231 on Monday, its highest since April 2018.
The British pound gained 0.1% to $1.3573.
Sterling has been swung by a surge in infections of a fast-spreading new coronavirus strain in the UK, with Prime Minister Boris Johnson ordering another nationwide lockdown.
It slid 0.73% on Monday, the most since Dec. 10, after earlier rising to $1.3703, a level not seen since May 2018.
Bitcoin traded at $31,367 following a roller-coaster ride to start the new year that took it to a record high of $34,800 on Sunday, followed by a tumble to as low as $27,734 the following session.
Reporting by Ritvik Carvalho; additional reporting by Kevin Buckland in Tokyo; editing by Larry King