Yuan trades near five-week low as Fed signals renewed pressure

China’s yuan traded near a five-week low, with the Federal Reserve’s signals of a potential interest-rate increase putting renewed pressure on Asian currencies.
China’s exchange rate fell as much as 0.24 percent as a gauge of dollar strength extended gains. The odds of a Fed rate increase in September shot up to 42 percent following comments from Chair Janet Yellen that the case to raise U.S. borrowing costs is getting stronger.
The yuan fell 0.15 percent to 6.6790 a dollar as of 5:57 p.m. in Shanghai, according to prices from the China Foreign Exchange Trade System. It dropped to 6.6850 earlier, the weakest since July 20. The offshore currency erased declines after the People’s Bank of China released its daily fixing, and was last trading 0.07 percent stronger.
“In the medium-term, the yuan definitely faces depreciation pressure, but the Fed won’t raise rates that aggressively,” said Gao Qi, a strategist at Scotiabank in Singapore. “If U.S. inflation and non-farm payroll data are strong, then yuan depreciation pressures will increase next week.”
The PBOC weakened its reference rate, which limits onshore moves to 2 percent on either side, by 0.55 percent yesterday. The cut was less than that predicted by both Scotiabank and Australia & New Zealand Banking Group Ltd. The fixing suggests that the central bank will defend the 6.7 psychological level, said  Iris Pang, senior economist for Greater China at Natixis SA.
“There might be some PBOC support in the market to prevent the yuan from falling quickly against the dollar, but not strong intervention to prop up the exchange rate,” said Kenix Lai, a Hong Kong-
based foreign-exchange analyst at Bank of East Asia Ltd. “Policy makers will want to defend the yuan at 6.7 in the coming months for G-20 and SDR inclusion. It’s not a good time to bet against the Chinese currency.” Bloomberg