SHANGHAI • The Chinese currency fell yesterday, heading for the steepest monthly decline since it was devalued last August, after the US Federal Reserve chief said an interest rate increase could come in the next few months.
Onshore yuan declined 0.24 per cent to a three-month low of 6.5814, extending losses this month to 1.55 per cent. The People's Bank of China (PBOC) had set the mid-point rate at 6.5784 per US dollar before the market opened, 0.45 per cent weaker than the previous fix of 6.549 and the currency's softest fixing since February 2011.
China only allows the yuan to rise or fall 2 per cent on either side of the daily fix, one of the ways it maintains control over the currency.
The US currency is poised for the biggest monthly gain since September 2014 as Fed chairman Janet Yellen last Friday said higher interest rates in the coming months look "appropriate".
"The dollar was further underpinned by Ms Yellen's comments about an 'appropriate' rate hike in the coming months, which led to more pressures for (the yuan) to weaken against the dollar," said OCBC economist Tommy Xie.
While the yuan slumped amid concern that higher interest rates in the United States will spur outflows of the Chinese currency, the fixing is becoming more predictable as it appears the PBOC is allowing market forces to play a bigger role in setting the daily rate, according to OCBC.
The Chinese central bank, in its quarterly monetary policy report, said the fixing is decided both by the closing price and the performance of a basket of currencies. The reference rate is now decided by the PBOC based on 14 lenders' submission of quotes, said Mr Sun Wei, deputy general manager of financial markets at China Citic Bank.
"The fact that we are able to forecast the daily fixing more accurately shows that the yuan has been more predictable than unpredictable as the PBOC has been following its revised fixing mechanism closely in the past few weeks," he said.
China should quietly allow wider moves in the yuan against a basket of currencies, a strategy that will reduce the cost of limiting declines, according to Mr Yu Yongding, a former PBOC adviser.
"The currency basket should be allowed to fluctuate within a big band, at least 20 per cent," he said.
Emerging-market currencies and bonds also fell yesterday, and look set to halt a streak of monthly gains, as demand wanes amid mounting signs of a US rate hike.
South Korea's won retreated 1 per cent to 1,191.75 per US dollar by the close of trading in Seoul and is Asia's worst performer this month after Malaysia's ringgit, which was down 0.9 per cent at 4.1165 per US dollar. South Korea's 10-year government bond yield rose three basis points to 1.81 per cent and Malaysia's climbed five basis points to 3.94 per cent.
Bonds in developing countries are likely to lose their appeal when the Fed raises interest rates, with yields on Treasuries due in a decade little changed at 1.85 per cent yesterday.