Yuan sees modest gain amid concerns over policy easing

Chinese yuan inched higher against the US dollar on Tuesday, reflecting a decline in US Treasury yields overnight. However, the gains were limited by growing expectations for further monetary easing in China, the world's second-largest economy.

Traders remained cautious ahead of the Federal Reserve policy meeting on Wednesday, with market attention focused on the outlook for rates. The People's Bank of China (PBOC) set the midpoint rate, the reference point for yuan trading, at 7.1055 per dollar, slightly firmer than the previous fix of 7.1097.

While the PBOC has consistently set the official guidance rate at firmer levels than market projections in recent months to maintain currency stability, Tuesday's midpoint was 708 pips firmer than a Reuters estimate.

In the spot market, the onshore yuan opened at 7.1779 per dollar and was trading at 7.1778 at midday, showing a slight improvement from the previous late session close.

Market analysts anticipate the yuan to trade within a narrow range, closely monitoring the outcome of the Fed policy meeting for insights into the US monetary trajectory that could impact major currencies.

Traders are also keeping a close eye on China's January manufacturing data scheduled for release on Wednesday to assess the domestic economic conditions. A Reuters poll suggests a likely contraction in manufacturing activity for the fourth consecutive month, indicating ongoing challenges in the country's expansive sector at the beginning of 2024.

Christopher Wong, FX strategist at OCBC Bank, highlighted the market's anticipation of additional support measures, particularly targeting consumption and rate cuts. The absence of new measures may pose a setback to earlier-announced initiatives and further weigh on sentiments.

By midday, the global dollar index was down, while the offshore yuan was trading at 7.1879 per dollar. The market remains vigilant amid evolving economic indicators and potential policy adjustments in response to broader economic conditions.

(With Reuters inputs)