(Bloomberg) -- China increased its support for the yuan by setting a significantly stronger-than-expected daily reference rate, after the managed currency weakened to a one-year low in the previous session.
The People’s Bank of China set the so-called fixing at 7.1934 per dollar, stronger than a closely watched line of 7.2 for the rate. Its premium over the average estimate in a Bloomberg survey also expanded from the previous session and is at the widest since August.
Beijing’s preferred tool to guide yuan expectations has been stronger than 7.2 since the US election, amid pressure from a rising greenback and increasing predictions from analysts that the central bank would buckle. Allowing a breach risks sending a signal to traders that the PBOC is comfortable with further yuan weakness, while holding the line suggests it may dig in for a fight with currency stability as a goal.
Officials are battling to slow the yuan’s decline from ongoing pessimism toward China’s economy and re-ignited trade tensions as US President-elect Donald Trump threatens fresh tariffs. Until the South Korean won slumped Tuesday on the brief imposition of martial law in the country, the Chinese currency was the worst-performing in Asia over the last month, down about 2% against the dollar.
To make matters worse, China’s bond-yield discount to the US has been widening due to increased bets on PBOC interest-rate cuts, which is encouraging investors to buy higher-yielding currencies overseas. China’s 10-year yield slid to a record low Monday, more than 2 percentage points below its US equivalent.
--With assistance from Iris Ouyang.
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