China's yuan slides past 7.3 floor on falling yields, rate cut bets

Updates closing price

By Jiaxing Li and Ankur Banerjee

Hong Kong, Jan 3 (Reuters) - China's yuan slid past the key 7.3 threshold to a 14-month low against the dollar on Friday, as crumbling yields, rate cut expectations and the threat of tariffs from the incoming Trump administration dented sentiment.

The spot yuan CNY=CFXS capped a fourth straight weekly loss in a stumbling start to the new year after shedding 2.8% in 2024. That was its third straight annual decline, reflecting most currencies' struggle against a strong dollar.

The spot yuan CNY=CFXS closed the onshore trading session down 0.14% at 7.3093 on Friday, its weakest level since Nov. 3, 2023.

Worries about the Chinese economy carried into the new year, with stocks plunging nearly 3% on Thursday, the first day of trading in 2025.

Long-dated Chinese yields also continued to slide, with 10-year CN240011= and 30-year government bond yields CN2400006= each falling by some 3 basis points to touch fresh record lows during trading on Friday.

Meanwhile, the prospect of a rate cut is heaping more pressure on the yuan.

China's central bank said it was likely to cut interest rates from the current level of 1.5% "at an appropriate time" this year, the Financial Times reported on Friday, citing comments the bank made to the newspaper.

The poor performance of China markets indicates weakening sentiment around Chinese assets ahead of Donald Trump's return to the White House, Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said in a note on Friday.

The U.S. president-elect has threatened to impose fresh tariffs on Chinese imports, keeping investors on edge about the impact on yuan-denominated assets.

The yuan has been hitting yearly lows routinely since Trump's election victory in early November on fears of increased tariffs on Chinese products and escalating worries about China's economic recovery, setting the tone for emerging markets.

"The only factor restraining USD/CNY now is the daily reference rates being held consistently under 7.20 against the swelling USD tide," Tan said.

Prior to the market opening, the People's Bank of China set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.1878 per dollar, 990 pips firmer than a Reuters' estimate.

Based on Friday's official guidance, the yuan is allowed to weaken as far as 7.3316.
"I do think USD/CNY is likely to be restrained below the 7.33 upper limit through the Lunar New Year, with the main wildcard being what Trump might do after his inauguration on Jan. 20," Tan said, referring to the Lunar New Year holiday that begins in late January.

The stronger-than expected fixing came as the U.S. dollar continued its bullish momentum. The dollar index =USD, which measures the U.S. currency against six other units, was at 109.1, just below the two-year high of 109.54 it touched on Thursday after a 7% gain in 2024.

The offshore yuan traded at 7.3565 yuan per dollar CNH=, down about 0.23% in Asian trade.

(Reporting by Jiaxing Li; Editing by Kate Mayberry and Susan Fenton)

((Jiaxing.Li@thomsonreuters.com;))