Sources: China's big state-owned banks sell dollars to prop up yuan

China's currency, the yuan, fell to its lowest level in four and a half months yesterday, as the strong dollar offset sales of "greenbacks" by state-owned banks, Reuters reports.

Some sources cited by Reuters say that China's big state-owned banks yesterday sold dollars in exchange for yuan in onshore markets in an attempt to prevent the collapse of the Chinese currency.

The yuan fell to a low of 7.2349 units/dollar - the weakest level since November 2023.

Before the market opening, the People's Bank of China (PBOC) set the average rate, around which the yuan can be traded in a 2% band, at 7.0957 units/dollar.

The spot yuan opened the day at 7.2294 units/dollar and was trading at 7.2347 at midday.

The PBOC has consistently taken a more dovish-than-expected approach since early last year, which traders interpreted as an attempt by Beijing to keep the yuan relatively stable and prevent any destabilizing decline.

Official data published on Monday show that, in March, American production increased for the first time in a year and a half, highlighting the solidity of the economy. In the given situation, the probabilities that the Federal Reserve (Fed) interest rate reduction cycle will begin in June diminish, Reuters notes.

According to the quoted source, the dollar index rose overnight to a maximum of the last four months: 105.075 points.

"We continue to see a forex market based on the dynamics of the dollar," claims Alvin Tan, head of the Forex Strategy department for Asia at RBC Capital Markets.

• Russia's central bank sees the yuan as the only option for reserves

Russia's central bank recently announced that it has no better options than the Chinese yuan for its reserves, following two years of the Kremlin's war against Ukraine and the subsequent seizure of its international assets, Caixin reports. There are limited alternatives to China's currency for use as reserves because the financial instruments of countries that are "friendly" to Russia carry too much risk, Moscow's central bank said in its annual report on Friday.

"The exchange rates of these currencies are extremely volatile, the markets have low liquidity, and in a number of such countries there are restrictions on the movement of capital, which is an obstacle to their use," the report states, adding: "These factors predetermine the key role of the Chinese yuan in the formation of reserve assets."

China has played an increasingly important role in Russia's economy as President Vladimir Putin has tried to reorient trade to Asia and away from Europe following wartime sanctions. Trade with Beijing has been a key factor in allowing Russia's economy to withstand sanctions, along with increased government spending.