Offshore yuan gains as PBOC raises fixing

The offshore yuan rose for a second day as China's central bank increased its daily reference rate by the most in a week amid a decline in the dollar.

The People's Bank of China strengthened its fixing for the first time in four days, after a gauge of dollar strength dropped the most in a week Monday. This followed data showing U.S. personal spending barely rose last month, which spurred speculation the Federal Reserve will hold off from increasing interest rates anytime soon.

"The pressures for the Fed to raise borrowing costs have eased due to the inflation data, and that's supporting the yuan today," said Banny Lam, Hong Kong-based cohead of research at Agricultural Bank of China International Securities Ltd., who expects the U.S. to act as soon as in June. "The yuan will likely fluctuate against the greenback in the near term, and weaken after the Fed increases interest rates. But it won't drop sharply as China's economy will show signs of improvement at that point."

The yuan traded in Hong Kong rose 0.02 percent to 6.5159 a dollar as of 5:14 p.m. in Hong Kong, extending a two-day advance to 0.15 percent, prices compiled by Bloomberg show. It rose as much as 0.14 percent earlier. The currency in Shanghai advanced 0.02 percent to 6.5095, according to China Foreign Exchange Trade System prices. The PBOC boosted its fixing, which limits onshore moves to 2 percent on either side, by 0.26 percent to 6.5060. That's the biggest increase since March 18.China will step up inspection and punishment of violations that interfere with the currency market, a State Administration at Foreign Exchange was cited as saying by Xinhua News Agency, adding that there is no need to adjust individuals' annual for- eign-exchange purchase quotas yet.

Development of the offshore market challenges the yuan's exchange-rate formation and independence of monetary policy, Zhou Chengjun, an official at the PBOC's monetary policy department, said at a conference in Beijing on Tuesday. Daily average trading volume of the currency offshore is about $240-250 billion, he said. That compares with a daily average of $18.9 billion in Shanghai's spot market.

Traders put the probability of the Fed raising rates at its June meeting at 38 percent, down from 42 percent a week ago, according to data compiled by Bloomberg. A report over the weekend showed China's industrial profits climbed for the first time in eight months in the January-February period, boosting speculation the nation's economy may be stabilizing.

In the money markets, the PBOC injected 60 billion yuan ($9.2 billion) via seven-day reverse-repurchase agreements on Tuesday. The seven-day repurchase rate, a gauge of interbank funding availability, dropped one basis point to 2.31 percent, according to National Interbank Funding Center prices. The yield on government notes due January 2026 fell three basis points to 2.86 percent.