Chinese Yuan Steadies After Large Drop in Official Rate

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China’s central bank earlier guided the currency to its largest one-day drop against the dollar in 18 months

The Chinese yuan recovered from a morning decline to end roughly flat against the dollar on Thursday, after the central bank guided the currency to its largest one-day drop against its U.S. counterpart in a year and a half.

The People’s Bank of China earlier weakened the yuan by 0.7% to 6.6726 per dollar. The central bank determines a daily dollar-yuan exchange rate, known as the fix, and allows the currency pair to trade as much as 2% above or below that level.

The change in the fix echoed market trading the previous day, but was less dramatic than many analysts had expected. Traders had pushed the yuan down after the U.S. unveiled tariffs on $200 billion more of Chinese goods.

The yuan fell further on Thursday morning before rebounding to close little changed at 6.6679 per dollar at 4:30 p.m. It was slightly weaker in the offshore market in Hong Kong, where trading ranges or hours aren’t restricted, trading at 6.6868.

Mainland share indexes also advanced, suggesting a broader recovery in investor sentiment could have helped, rather than any central bank intervention. Still, while a weaker currency makes China more competitive, it is in Beijing’s interest to control the pace of any decline to avoid sparking capital outflows.

“This is very different from 2015, when it was the PBOC who initiated the move,” said Eddie Cheung, Asia currency strategist at Standard Chartered Bank, referring to a previous devaluation. “This time around, it’s driven by the market,” Cheung said. “The PBOC has been leaning against all of this.”

An intensifying trade conflict between the world’s two largest economies has put fresh pressure on the Chinese currency in recent weeks. Monetary policy is also weighing it down: while China’s central bank could cut interest rates or free up banks to lend more in the coming months, the U.S. is set to keep raising rates.

The yuan has now declined 2.3% against the dollar in 2018, retracing gains made early in the year. It has also reversed its annual advance against a basket of currencies weighted by trade volumes, according to a gauge published by Wind Info.

Tracy Chen, a portfolio manager at Brandywine Global, said Chinese authorities had earlier tried to use the currency “as a gesture to show the U.S. that they didn’t want to have a trade war.” She said she viewed its recent decline “as a catch-up depreciation.”